There are many aspects of running a business, but the bottom line is that you provide services or products in exchange for payment from customers. Customers can be individual consumers, or your company can perform commissioned work for other companies. Another reality of many businesses is that contractual obligations are often not met and non-payment of business-to-business (B2B) debt can jeopardize a company’s success.
“B2B or business-to-business collections is, quite simply, the process of collecting outstanding payments from a customer, rather than B2C (business-to-consumer) collecting money owed from customers,” said Steve Pritchard, Founder by Checklate.
If the other company your company is working with is not paying you for your services, there are processes and steps you should take before considering legal action, which should be a last resort for a small business.
Collection steps in the B2B area
“Each company should have its own established process, sometimes dictated by its particular industry,” said Elliott Portman of the Portman Law Group PC. “In general, there should be a credit manager who oversees the lending and collection process. As soon as an invoice is longer than 30 days, this credit manager should be personally involved in the collection efforts, e.g. B. reminders by phone and a formal written request for payment.”
payment request
You may have already taken the actual first step of sending out reminders and asking for payment, but if that doesn’t work, it’s time for a collection letter. This communication is extremely important and often leads to voluntary payment by the debtor.
The debtor may take a reminder more seriously if it comes from a B2B debt collection attorney, as they see the risk of litigation if they continue to default on their obligations.
The reminder letter should contain the following:
- Inform the company that an attorney is trying to collect their debt.
- Give them a chance to respond to deny the debt.
- Give them an opportunity to discuss alternative solutions to paying off the debt, including partial forgiveness or payment arrangements.
The answer option serves several purposes. Not only does it give the debtor a fair chance to dispute the debt, but it also confirms their contact information. You can also phone the business owner to notify them of a debt collection attempt.
investigation of your debtors
Because commercial debt collectors are not subject to the same restrictions as consumer debt collectors under the Fair Debt Collection Practices Act, you can use many investigative tactics to locate your business debtors and find ways to collect payments. The Fair Debt Collection Practices Act does not protect debtors from the party trying to collect a debt, be it the creditor or a collection agency. However, the law states that debt collectors cannot reach the debtor at inconvenient times (before 8:00 a.m. or after 9:00 p.m.) or on phone numbers that the creditor or debt collector has asked not to call anymore.
Tactics like skip tracing can identify a business owner’s location. Other investigative methods can uncover hidden assets of the client company, which can be used to compensate the business creditor.
In an article for collections agency Brown & Joseph, Mikaela Parrick explains that skip tracing “is the process of locating a debtor who has ‘skipped’ or left town… Skip tracers are particularly helpful in cases where the debtor has not responded or has returned repeated calls and emails. Even if a customer has a physical address to send collection letters to, there’s always a chance that the person they’re looking for no longer lives there.”
While skip tracing is a viable technique, “it is advisable to speak to legal counsel before taking any action,” said Dennis Sawan, managing partner at Sawan & Sawan law firm.
B2B debt collection via a debt collection agency
The last option before taking legal action would be to hire a collection agency.
“They’re useful for small claims that an attorney might not handle,” Portman said. “Ultimately, they cannot initiate debt collection, so they are of limited use to the creditor. A letter from a lawyer often has more impact on the recipient. It shows the debtor that the creditor takes the situation very seriously.”
However, collection agencies can still benefit both parties. Sawan said a collection agency is one possible way to avoid the unwanted publicity of litigation and the damage a lawsuit can do to the B2B relationship.
“In situations involving longer sales processes, long-term relationships, or higher balances, a less aggressive approach can often make sense,” Sawan added, although he said businesses should expect mixed results with a collections agency, and that doesn’t always work. “In our experience as litigators, sometimes it takes a sense of urgency to get a debtor organization to prioritize the disputed debt. This is often achieved through litigation, which increases the potential cost to the debtor.”
While it may seem like litigation is always the best option, some companies just don’t want to deal with it.
“A collection agency can simplify the process of handling outstanding payments for your business by removing a lot of the responsibility and stress that comes with the problem,” Pritchard said. “If you’re forced to take legal action, they can often refer you to specialist lawyers as well, or they may have an in-house legal team available.”
Keep in mind that most collection agencies charge 25% or more of the money collected, according to Pritchard.
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Debt Collection Procedure
If attempts to collect a B2B debt out of court continue to fail, you may have to file a debt collection suit against the corporate debtor. One benefit of having a B2B debt collection attorney handling your debt collection is that if litigation is required, the attorney can assert a legal claim on your behalf and represent you throughout the subsequent case.
“Litigation is helpful in bringing parties to the table, and the added expense of defending a claim often increases the urgency needed to settle outstanding debts,” Sawan said.
If a debtor doesn’t respond to a lawsuit, you can get a default judgment against the company. When a debtor responds, they will often dispute the validity of the claim against them.
To successfully obtain a judgment in these situations, you must validate the claim by presenting evidence to the court. Here are some examples of such evidence:
- Contracts signed by both parties agreeing to payments
- Canceled checks of previous payments
- Emails indicating an admission of guilt
- Orders stating the amount owed
- Bills previously filed for the debt
- Bank statements showing payment history or lack thereof
- Any other relevant documents proving the existence and nature of the debt
In many cases involving small businesses, the owners may simply have had a verbal agreement on the debt. Proving guilt in these cases can be more difficult, but you can still validate your claim with circumstantial evidence. If you successfully prove the validity and non-payment of the debt, you will likely receive a judgment against the business debtor from the court.
However, a judgment on a business debt doesn’t automatically mean that you will see that money, so you need to find ways to enforce collection of the judgment. Methods of foreclosure include securing liens on the business debtor’s property, garnishing his business assets, or obtaining a writ of execution to confiscate assets from the company’s accounts or property.
How to avoid a B2B debt collection process
“The cheeky response would be to receive prepayment or a credit card payment up front,” Portman said. “In the real world, the only way to minimize risk is to never extend credit to a new customer without them completing a credit application and going through a credit approval policy. Businesses should regularly screen their customers for ongoing creditworthiness.”
Many legal experts agree that while solid contracts and paperwork are helpful, nothing beats good judgement. But when it comes to contracts, “Provisions in contracts that require liquidated damages, attorneys’ fees, or late fees, if applied properly, can be a useful deterrent to non-payment,” Sawan said.
Andrew Weisblatt contributed to the writing of this article.
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