For small businesses, incurring debt and extending credit allows them to operate and grow in an efficient manner. Small businesses continuously extend credit and incur debt by allowing payment at a date later than they received those goods or services. When a company performs a service and allows payment within 30 days, it becomes a creditor to the company for which it performed the service. This flexibility in payment allows small businesses to flourish.
Why do some small businesses have debts?
Unfortunately, small businesses are not always able to repay these debts. Whether due to declining business or working capital issues, some debtors simply will not be able to make good on their debt within the originally agreed terms. If a debtor has missed payment for a debt owed to a business, the business should first consider the possible cause for the lack of payment. We commonly see four reasons causes for missed payments between small businesses:
- The debtor forgets to pay the amount, often due to internal communication breakdowns;
- The debtor lacks adequate liquidity to pay the debt;
- The debtor is withholding payment due to a dispute that has been raised or is soon to be raised with the creditor; or,
- The debtor is withholding payment in bad faith in hope that the creditor will accept a lower sum or simply not pursue the payment.
As a small business owner, you will undoubtedly be faced with a situation of unpaid debt. If you are a small business owner and have an invoice, bill, or debt that has gone unpaid, consider the following steps:
- Contact the debtor to inquire about the cause of the delinquency, informing them that you are aware that the debt is past due and must be paid.
- If the debt remains unpaid, send an official letter via certified mail to the debtor identifying the amount owed (with applicable interest) and original payment date, and demand payment on a specific date. Make sure to document all communication.
What options do you have as a small business owner?
If the debt remains unpaid following the above, then small businesses have several options including:
- Contact the debtor and offer to reduce the amount to be paid if paid immediately;
- Hire a collection agency specializing in business-to-business debt recovery;
- Sell the outstanding debt for a discounted rate; or,
- Consult with your lawyer on the possibility of filing a lawsuit to attempt to recover.
Note that this blog refers to business-to-business debts, and is not applicable to consumer debt, which is governed by a complex set of federal and state laws. When seeking to recover the outstanding debt, always consult with an experienced business attorney to fully evaluate your options to identify the best commercial outcome for your business.
Business Lawyers Serving Augusta, Georgia
At Klosinski Overstreet, our attorneys have extensive experience representing both creditors and debtors – we work tirelessly to ensure that your interests are protected. We are experienced business and litigation lawyers with strong accounting skillsets. If you are facing debt issues and considering bankruptcy, or are a creditor seeking to recover outstanding debts owed, please contact our office today to schedule a consultation.