You wear many hats as a small business owner. As you’re growing your business by creating products and services and managing staff and customer relationships, some areas may lose your time and focus. When it’s your debt obligations that fall through the cracks, you might find yourself dealing with a debt collector.
In this guide, you’ll find general information on how to deal with debt collectors, from paying off what you owe responsibly to getting legal guidance when things have gone further than you intended.
Note that the information in this guide is not specific to loans administered by Pursuit. If you need assistance with your Pursuit loan, please reach out to the appropriate Pursuit team member.
What can lead to debt collection?
Every business has creditors and yours likely includes some mix of vendors, service providers, landlords, and lenders. With numerous invoices coming in at any given time, it’s not unusual to overlook one or miss a payment if you’re not keeping up with your finances.
In most cases, you can get back on track as soon as you realize the error. But if a creditor decides that you’re falling too far behind, they may send your debt to a debt collector – an individual or agency whose sole purpose is to try to get payment from you.
How to navigate the debt collection process
When you’re facing the debt collection process, you always want to protect your business’s assets and reputation, professionally and legally.
The first thing to remember? Don’t panic. Keep in mind that when debt collectors call, there’s usually a valid reason and that means that there’s always a resolution. When you take steps to resolve the situation, you begin to regain control, which can go a long way to relieving your stress.
Remember that this is usually a short-term challenge. Once you successfully resolve your situation, you’ll be ready to get your business back on track.
How to deal with debt collectors: Steps to take for a successful resolution
When your business misses debt payments, it’s likely that creditors will take action to recoup some or all of what they’re rightfully owed. There are actionable steps that you can take to relieve some of the stress of debt collection:
1. Communicate professionally
When debt collectors contact you, be calm and professional. While it’s their job to collect on a debt, and some may do so in ways that are intimidating and unprofessional, it’s important that you not let them get to you.
Instead, listen to what they have to say and collect information. Get their name, the name of their agency or firm, the name of the vendor, customer, or lender they’re representing, and the amount owed. Then, let them know that you’ll research the information and set a date and time to follow up with them. This way, you’ll have time to do your research and, if necessary, contact your accountant and/or attorney for advice.
Staying professional and calm will not only help you resolve the issue sooner but also help you gain some control over the situation. Knowing what you owe and developing a plan to pay it off are critical to regaining your composure and confidence.
2. Review the debt
After you’ve gathered information on the debt, do your research to confirm that it’s valid. Often, it will be exactly as the debt collector stated: You owe X amount to Y lender or creditor. Sometimes, though, the amount will be off or you may have already paid the debt or worked out a payment plan with a creditor, but the information hasn’t made it to the debt collector yet.
A debt collector may also contact you about a debt that was already discharged or isn’t legally collectible (called zombie debt), in which case you shouldn’t have to pay. Other times, you might get a call about a debt that you didn’t know you had because it’s the result of identity theft or hacking.
3. Seek legal advice
Contact your attorney right away if the debt is zombie debt, the result of identity theft, you’re uncertain about how to handle it, or if the debt collector is using language that sounds threatening or unfair.
A lawyer with experience in small business law and/or debt collection is a valuable resource. They can help you understand your rights (and when they’re violated) and, if necessary, they may manage your case for you.
4. Research your state’s laws and other rights that you (and your creditors) have
As a business, you won’t have the same rights regarding debt collection that are protected for individuals under the federal Fair Debt Collection Practices Act, but you do have some rights to fair and professional debt-collection practices.
Each state has its own debt collection laws for business, so research those for your state to get a better understanding. You should also review the Uniform Commercial Code (UCC), which is a set of laws governing commercial transactions that are applied uniformly across the US. Creditors can file UCC-1 filings to obtain rights to your collateral.
Also, take a look at the “best practices” for debt collection that are outlined by the Commercial Collection Agencies of America (CCAA), an organization for debt-collection agencies in the business-to-business realm. Member agencies have to follow specific ethical standards. Although not all agencies are members (and non-members don’t have to adhere to these standards), it’s possible that the CCAA’s standards can help you set expectations for the kind of treatment that you hope to have from debt collectors.
5. Negotiate payment plans and get the facts in writing
If the debt is valid, you’ll need to work out a payment plan with the debt collector. If you’re able to pay it off in full, that’s ideal and it will get the situation behind you quickly.
If you need to pay over time, then set up a plan that works best for you. From a creditor’s perspective, as well as for the debt collector, payments of any sort are a win, so you have some leverage here.
Many debt collectors are willing to work with you to create a reasonable repayment schedule. Before you follow up, work through your business’s budget so that you can propose a plan that works for you. Otherwise, the debt collector is likely to suggest making payments that could increase your financial challenges.
Make sure you get the plan in writing to protect you and your business from any predatory practices by the debt collector.
6. Follow through on payments as agreed
Once a plan is set up, prioritize the payment and make it as agreed. If you have bookkeeping software that lets you make automated payments, add this to your system so that it pays the debt without much further thought (or worry) on your part.
If you don’t have that in place, consider it a good investment now. There are low-cost programs available, such as QuickBooks and Xero, that can help you easily manage your receivables and payables.
What to avoid for a successful resolution
When dealing with debt collectors, what you don’t do is often as important as what you do. Here are some recommendations on what to avoid doing:
1. Don’t ignore communications from debt collectors
When your creditors use debt collectors, they’ll find a way to contact you. Trying to avoid them by not answering their calls or letters can escalate the situation and potentially lead to lawsuits.
Taking a professional approach to communications will go far in alleviating the pressure you feel and is a positive first step to resolving the problem.
2. Don’t accept liability without verification
Don’t agree to pay a debt without verifying its accuracy and ensuring it’s still collectible. In many cases, you’ll know that the debt is valid. If you have any questions or doubt, ask for written notice or proof of the debt, including the creditor and the amount owed.
3. Don’t provide unnecessary information
If you believe that a debt collector is contacting you about zombie debt or other uncollectible debt, you don’t want to risk potentially reactivating the debt or paying something you don’t actually owe.
Stick to the basic information at hand: The debt owed, the creditor that it’s owed to, the amount, and the debt collector’s information. Don’t share additional information about your business or its revenue.
Take your time to confirm the debt is valid, review your budget, and develop a payment plan that you can propose to the debt collector. Otherwise, you could unintentionally put assets at risk or commit to a repayment plan that you can’t meet.
4. Don’t make payments until you receive your payment agreement in writing
Before making any payments, make sure you have a written agreement outlining the terms. For example, sometimes a debt collector will try to get you to make an initial payment over the phone as a show of goodwill before sending you the written agreement.
It’s important that the agreement specifies that the debt will be considered paid in full upon completion of the agreed-upon payments. This prevents a debt collector from adding on additional fees, penalties, or additional interest. If they decline to provide a written agreement prior to payment, talk to your attorney about next steps.
5. Don’t let stress cloud your judgment or actions
While the best way to deal with debt collection stress is to successfully resolve the situation, it can take time to get it all behind you. In the meantime, do your best to stay calm through the process.
Keep in mind that this is temporary and that, in a way, it’s actually a positive step to get your business’s finances back on track.
FAQs about debt collection
Q: Are there laws that regulate how debt collectors can interact with my business?
A: Although the Fair Debt Collection Practices Act primarily covers consumer debts, some states have laws that apply to business debts. It’s important to research your state’s regulations or consult with an attorney who specializes in debt collection and/or small business.
Q: Can a debt collector contact other people about my business’s debt?
A: Generally, there are restrictions regarding who they can contact about your debt. For example, most states don’t allow debt collectors to disclose details of your debt to third parties without your permission, although the specifics vary by state.
Q: What practices are considered unfair or abusive?
A: Harassment, threats, using misleading or false statements, or employing unfair practices to collect a debt are generally prohibited, although protections for businesses are guided by local and state laws.
Q: I think the debt collector that contacted me is engaging in unfair practices. What should I do?
A: If a creditor is engaging in unfair debt-collection practices against your business, there are two recommended steps.
First, talk to an attorney who specializes in debt collection and/or small business to learn about your rights and have them addressed. Second, you can report them. Contact your local or state Department of Commerce (or similar business-related agency) for guidance.
You can also file complaints with federal agencies, such as the Federal Trade Commission. Debt collectors who engage in unfair, unethical, or threatening practices should be reported.
Q: What options do I have if I can’t afford to pay the debt?
A: If you can’t afford to negotiate a payment plan, there are some options available, but you’ll want to talk to your accountant and an attorney before making your decision.
You could get a debt-consolidation loan. This type of loan will roll most or all of your outstanding debt into a single loan that you pay off (usually with a monthly payment). It can relieve the stress of having debt collectors contacting you, and simplify your payments. In some cases, you could roll your existing debts into a loan with a lower interest rate (although that’s not always the case).
A debt consolidation loan won’t erase your debts and you may end up taking longer to pay it off. Just know that the extended timeframe can lead to a lower and more affordable payment overall.
Other potential resolutions include debt settlement, restructuring, or bankruptcy, all of which have differing but potentially serious financial consequences for your business. Seek legal and financial advice from your attorney and accountant before deciding your next steps.
How can I avoid going into collections?
The best practice to keep your debt in good standing is to pay it back as agreed. Here are some other best practices for managing your business debt:
- Pay all of your debts on time and as agreed, including any payment plans developed as part of a debt-collection process. Don’t take on more debt than your business can handle.
- Maintain your business records. It’s good practice to have accurate financials and it can also be key to resolving debt collections. When your records are up-to-date and accurate, you’ll know whether or not your payments have been made as agreed. If a payment was missed, then it will be easier to develop your financial-management plan to resolve the issue because you have accurate records as a foundation.
- Use business-management software to help you stay on top of your business’s accounts payable and receivable.
- Review your financials daily or weekly until you know exactly what’s coming in, what’s going out, what’s left to hold in a cash reserve, where you can cut expenses, and where you should invest for profitability and growth.
- Build cash reserves through better financial management and, when you’re ready, consider a working capital loan or line of credit to help you manage revenue cycles and cover emergencies without taking on high-cost debt.
Pursuit has loans available to consolidate debt, build working capital, and more
Pursuit is a leading small business lender throughout New York, New Jersey, Pennsylvania, and Connecticut. We offer a wealth of small business resources that you can use to build your management skills as your business grows.
We also have more than 15 loan options and a line of credit that can help you consolidate high-cost business debt and meet your working capital needs. Take a look at our financing options, then reach out to us to learn how we can work together to keep your business growing.
