After bills remain unpaid for certain amounts of time, they eventually go to collections. You may have a completely legitimate reason for the bill going unpaid, but the important thing to keep in mind now is that it’s in your best interest to deal effectively with the collections agency handling your debt. Your business’ financial future may very well depend on how you respond to collection notices.
Here are some things to consider when your business debt goes to collections.
Even when some of your debts are in the collections process, it doesn’t mean that you should stop seeking out ways to generate more business revenue. Stay in touch with your clients and customers to find out what services or products you could provide for them. Use customer feedback to determine different ways that you could enhance your business model or expand the exposure of your business. Present markdowns for your VIP customers if they can pay for your services faster than normal. Get in touch with suppliers to negotiate payment deferrals or discounts. All of these ways help you to generate revenue for your business or to hold onto earned revenue for longer periods.
Debt collection is a lengthy process, typically beginning 30 days after a debt’s original due date. During this time, the now overdue payment may be regarded as delinquent by credit reporting agencies. Your business may receive phone calls and notices in the mail requesting immediate payment or suggesting payment options. Usually after 180 days, the creditor will stop its collections activity and sell the debt.
The debt is then taken on by a collections agency, giving the original creditor a means of regaining some of their losses. You still owe the same amount, but now you must make payments to this new company as they’ve purchased the right to collect from you.
When handling your business debt with the debt collector, it’s wise to not make any hasty or rash decisions. Here are a few tips to create the best outcome for this debt collection situation.
• Gather Facts: It’s your right to request and to receive debt verification and debt validation documents. The debt collector has five days to successfully send you a debt validation letter after their first contact with you. Note important facts about the debt, such as its history, the amount, the collector’s information and the age of the debt. Locate and note your own records and credit reports to compare them with the debt validation letter for accuracy. Ask for a debt verification letter if you require more information.
• Know Your Rights: Read the Fair Debt Collection Practices Act to inform yourself on what collectors can and cannot do. Collectors cannot threaten you with arrest or call at all hours of the day, for instance. It would also be a good idea to seek legal counsel for additional information or to pursue legal action against the collection agency.
Research your state’s laws and available legal options on debt collection, as the states differ with regard to the protections that they offer consumers and businesses. In a 2015 study by CreditCards.com, three Texas cities were ranked in the top five for credit card debt, with Houston, Texas ranking in fifth. If your business is in or near Houston, consider consulting with a Houston business debt collection lawyer. Lawyers who specialize in state and local laws are your best choices if a collections agency decides to take you to court or if you are seeking legal action against a collections agency. If you have the funds readily available, it would be a good idea to keep such a lawyer on retainer to assist you through the entire collections process.
• Pick Your Path: Selecting a payoff method or alleging that the debt is in error are the two most common paths of handling debt collections.
If you opt to pay your collections account, decline giving the collector access to your bank account. Get payment plan or settlement agreements in writing as proof of the agreement.
You can claim that the debt is in error, which could mean that you already paid it off or that the debt belongs to someone else. The debt collection process will halt while the company investigates. However, if it concludes that the debt is valid, then they will mail the debt verification notice to you. If you were correct, then the debt collection process against will cease.
How unpaid business debts will affect your credit depends on if you’re running a sole proprietorship, an LLC or a corporation.
Sole Proprietorships: In a sole proprietorship, your business credit literally is your personal credit. You will be held liable for business loans or credit cards that you apply for. Missed payments and collections activities will damage your personal credit score. Bad credit from issues like collections actions will cause your new loan requests to be refused.
LLCs: A limited liability company is a “pass through entity,” meaning that its results are recorded on your individual tax return. Your personal credit still affects your business, but not as pronounced as a sole proprietorship. Conversely, business debts and collections have less of an impact on your personal credit.
Corporations: In a corporation, your company exists as a separate legal entity with its own taxes, bank accounts and tax ID number. There are different types of corporations, with the C-Corp being the more self-reliant version when it comes to financial decisions and standing when compared to the owner or founder of the corporation. Corporations can opt for their own credit scores when they reach a sufficient stage of growth: business debt collection activities will hurt the business credit score in this case.
Being in the business debt collections process is something that no one wants to endure. It can be difficult to plan how your business can pay off debt collections. Keep in mind the advice previously mentioned, such as contacting customers and suppliers, knowing the debt collections process inside and out, learning ways to effectively handle your business' collections account and understanding the debt's impact on your credit. Remember to discuss matters with the collections agency or a business debt collections lawyer to get the most actionable information for your business’ benefit.