Debt Collection for Small Business
By: Michael J. Velletta, Barrister & Solicitor ()
Many small business owners are reluctant to retain the services of a lawyer to collect outstanding accounts, because the cost of doing so often exceeds the amount they are owed. These little debts can sit around for months, causing cash flow and bookkeeping headaches. Many small outstanding debts can add up to one really big problem. How can you collect what your business is owed without going into debt yourself? There are several ways to manage the issue effieciently.
One of the best way to avoid accounts receivable is to know your client before you start work. Is the client situated, for example, at a fixed location? Does the client have the money to pay you? Is the client willing to give you a deposit? Will the client sign a contract? Clients that are evasive about things like this should be taken on with great caution. If you are concerned that your client may not pay you, try to get paid (even partially) in advance. Don't be so eager for business that you ignore the fact that not all clients are desirable clients. Some may actually end up costing you money if you are not careful.
One option to consider with respect to collecting outstanding accounts is to hire a collection agency. Most collection agencies have "no collection, no fee" policies, and take a percentage of whatever they do collect. Count on spending about one third of the amount collected if you decide to hire a collection agency. One advantage of hiring a collection agency is that you save yourself the time and trouble of going after the money yourself. However, depending on the amount of the debt, it can cost quite a bit more than going after the money on your own.
Another option is to take advantage of the Small Claims system. The Provincial Court of British Columbia (Small Claims Division) hears all claims in the province that do not exceed $10,000.00. The documents you need to start an action are available at any Court Registry, and are also sold at some office supply stores. The Small Claims system is quite "user friendly, "and many people appear on their own in Court at this level.
You start your lawsuit by filing a document called a Notice of Claim at the Court Registry. There is a small filing fee - $50.00 if your claim is under $5,000.00, and $100.00 if your claim is between $5,000.00 and $10,000.00. You can recover this fee if you win your lawsuit. After filing the Notice, you must serve it on the person or company you are suing (the "Respondent"). You can serve a Notice of Claim yourself, you can hire a process server to serve it, or you can send it to the Respondent by double registered mail.
If the Respondent files a Reply, a Settlement Conference is held. At the Settlement Conference, both parties sit down with a judge and attempt to resolve their dispute. If they are successful, the case concludes. If they are not, the case is set for trial. If you win at trial, you will have a Court Order that says the Respondent must pay you.
If the Respondent completely ignores your claim and does not file a Reply, you can be granted a Default Order (in other words, you automatically win your case). You will get a Court Order that says the Respondent (now called the "Judgment Debtor") must pay you (just as you would after a trial). You may then set about collecting on the Order. You can, for example, garnish the Judgment Debtor's bank accounts, seize assets, register the judgment against property or even, in extreme circumstances, have the Judgment Debtor put in jail.
All debts are different. The approach you decide to take should always depend upon the character and circumstances of the debtor and the amount of the debt. However, it is often the case that with some concerted effort, you can clear up your accounts receivable and get on with building a profitable clientele.