Debt Collection for Small Businesses

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 What is a Small Business?

A small business is a business that is owned and operated privately. It has a relatively low volume of sales. It also has a small number of employees. Standards for small businesses vary by state and by industry. 

In general, a small business has less than 500 employees for manufacturing industries or less than $7 million in annual income for a non-manufacturing industry. A small business may be a corporation, partnership, or a sole proprietorship.

What is Debt Collection for Small Businesses?

A large number of small businesses maintain an information relationship between their customers and other businesses in their area. A mentality of “put it on my tab” often assists a small business build network connections with customers as well as local businesses in the area.

However, there may come a time when a small business is required to collect on an outstanding debt to help tie up loose financial ends. This process is known as debt collection. Debt collection is a vital aspect of any small business operation.

In general, debt collection is not a problem for a small business. Especially since many customers and business contacts understand how small businesses operate. 

In contrast, debt can be a problem for a small business if a borrower refuses to pay. Debt collection may also become a major issue during the wind-up phase of dissolving a small business.

How Can Small Businesses Go about Collecting Debt?

A small business can take several different approaches when attempting to collect debt payments. The approach taken may depend on the relationship with the borrower. It may be necessary to try different approaches, especially in cases where the borrower is not willing to pay or simply does not have the funds to pay their debt.

Some debt collection approaches may include:

  • Writing a polite letter or e-mail, which may help remind the party that they owe the small business money or services. In many cases, they have simply forgotten that they owe the debt;
  • Making a phone call or sending a text message, which can be useful as a follow-up to the letter or e-mail; or
  • Creating a repayment contract with the borrower, which can help get repayments started without demanding too much money at one time.

When attempting to collect a debt, the most important thing to remember is not to harass the borrower. They are valued contacts whose business and connections are valuable.

It is important to note that debts have a statute of limitations. These statutes of limitations may vary based on the type of case and jurisdiction. For debt collection, a statute of limitations is the amount of time in which a creditor may ask a court to force a debtor to pay. Because the court systems do not keep track of an individual’s debts, it is up to the individual to prove whether a debt has passed the statute of limitations.

What if They Still Won’t Pay?

If the debtor still fails to pay, it may be necessary to take more direct measures. These measures may including:

  • Hiring a collections agency;
  • Offering to settle the debt at a lower payback price, which may include forgiving a portion of the debt or not charging interest on the amount; or
  • Filing a lawsuit.

Filing a lawsuit is a last-ditch effort. However, it may be necessary at the outset if a direct legal violation is involved.  

A debt collection agency is a business that specializes in contacting parties on behalf of a business that is attempting to collect debt payments. These agencies are professional services and may be useful for a small business to act as a go-between with the debtor. They can assist in avoiding confrontations between the borrower and the small business.

It is important to remember that filing a lawsuit will not necessarily destroy the relationship with a client or another business. It may simply be that clarification is needed for a financial figure or for certain laws in the area. These issues may be resolved through the legal system and the courts in the area.

What Laws Apply to Debt Collectors?

The Fair Debt Collection Practice Act (FDCPA) is a federal law enforced by the Federal Trade Commission (FTC). It prohibits a debt collector from engaging in abusive, deceptive, or unfair practices when they are attempting to or collecting money from a debtor. It is important to note that the FDCPA protects individuals but not businesses. 

What is a Time-Barred Debt?

While a small business wants to maintain good relationships with customers and other businesses, they should be aware that after a time period, they may not be able to collect on a debt. 

A time-barred debt is debt for which the statute of limitations has expired. This means a creditor cannot sue an individual to collect this debt. If an individual can prove to the court that the statute of limitations has expired, a creditor will not be able to obtain a judgment against the debtor.

What Happens to Time-Barred Debts?

The Fair Debt Collection Practices Act prohibits a debt collector from suing or threatening to sue an individual for a time-barred debt. Debt collectors, however, may still attempt to collect on these debts. They are still permitted to attempt to collect these debts using phone calls or letters. Time-barred debts may also appear on an individual’s credit report if the time limit for reporting the debt has not expired.

What is the Fair Credit Reporting Act?

The Fair Credit Reporting Act (FCRA) is a federal debt collection law. It protects how an individual’s credit information is shared with a third party. The Act provides instruction on how debt collections must be reported to the three credit bureaus. This law may apply to a small business if they have to report a debt to a credit bureau.

For example, a small business may violate the FCRA if they report information to the credit bureaus regarding a debtor that is inaccurate or false. For example, reporting a debtor is six months behind on payments when they are actually only three months behind. The three main nationally recognized credit bureaus are Equifax, Experian, and TransUnion.

There are companies that collect and provide credit history information to credit bureaus. These information collection companies are required to, but not limited to, complete tasks such as:

  • Updating any and all inaccurate information provided to a credit bureau;
  • Disclosing any negative information reported about an individual; and
  • Having identity theft reporting and prevention procedures in place.

Do I Need a Lawyer for Help with Debt Collection for Small Businesses?

Yes, it is important to have the help of a small business lawyer with any debt collection issues for a small business. Debt collection for a small business may be complex. If there are any issues or concerns with debt collection for your business, you should contact a lawyer as soon as possible. It is important to attempt to collect a debt prior to its statute of limitations expiring.

A lawyer can help by reviewing your case and provide advice regarding your options for debt collection. An attorney can also assist if it is necessary for you to file a lawsuit or hire a debt collection agency. If a lawsuit is required, an attorney can assist and represent you during any legal proceedings, if necessary.

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