Collecting Business Debts

How to Collect Business Debts

My client won't pay me. My customer refuses to pay me. Help! Our client won't pay us for what they bought -- Sadly, we've heard these laments from many entrepreneurs victimized by scumbags who won't pay up. Here are a few tips on collecting those business debts.

What can you do when a customer doesn't pay for goods and services you've already delivered?

Collecting Business Debts

Is it necessary to pursue legal action to collect what you are owed? Are there other ways to collect unpaid business debts?

Here are a few options for collecting business debts, as well as some general tips on business debt collection.

Be a Pain

If you never remind your customer that they owe you money, you will probably never get paid. Be sure to contact them frequently to ask them status on payment. Send them monthly statements to make sure they know you haven't forgotten about the debt. When it comes to debt collection, the squeaky wheel is the one that gets paid.

Threaten to Sue

Before you sue, threaten to sue. You will want to send them a demand letter that demands payment and clearly lays out the consequences of nonpayment. (We've got a sample demand letter for bad collection that is worth reading.)

Sometimes the threat of a lawsuit will work wonders on getting a deadbeat business to pay up. However, if you talk the talk, you better be ready to walk the walk. You don't want to make an idle threat. If you promise to initiate legal proceeding on a specific date, do so.

Small Claims Court

If the dollar amount is not too large, small claims court is a great option. Just visit the small claims court and ask how to file a claims action. After you complete the paperwork, the court will set a date for your case.

The filing fees are reasonable, and it's a fairly quick process. Plus, the nice thing is you don't have to hire an attorney.

In the absence of lawyer fees, it's worthwhile to pursue small claims, and that's why small claims courts were created. Without small claims court, you would have no good legal recourse to chase after small amounts of money.

The downside is that small claims only works if the amount of money you are owed is small. Every court has different limits, so you will need to check with your court.

Civil Court Filing

If you've been stiffed for larger amounts of money, you'll need to file in civil court. This is a more complex process, and while a lawyer is not required, you need a lawyer to be credible.

The more impressive your lawyer, the more likely the debtor will settle. If you use your cousin Marvin, the real estate lawyer, to file the suit, the debtor is not going to be overly intimidated.

Lawyers work on either a time and materials basis or on a contingency basis. Most good debt collection lawyers won't take a case where the amount owed is less than, say, $40,000. That's because if the court goes to trial and the amount owed isn't too large, the legal fees can add up to the point where you may drop the case.

If you go with a lawyer who works on a contingency basis, expect them to ask for 15% or more of the amount collected.

Debt Collectors

Hiring a collection agency is appropriate in some instances but not in others. It's a good idea to call a number of collection agencies and explain your situation to them. They will let you know if they think they can collect the debt. Be aware that many scumbag businesses out there don't flinch when a collection agency chases after them. If you think your debtors are serial bad guys who constantly purchase products and services, it's best to bypass the debt collectors and go straight to the legal system.


Occasionally, parties involved in a dispute will hire a mediator to help the parties arrive at a settlement. In this case, two sides must still voluntarily agree on a settlement. Even if there's bad blood between you and the debtor, a mediator may be able to resolve the issue by refocusing the conversation on the facts.

Contacting the Authorities

If cannot collect money that is owed to you, you can contact the Better Business Bureau and your state's credit bureau. You can have your bad debt recorded on the scumbag's credit record. Justice may play out years later when a bank or investor refuses to do business with the debtor because of the bad debt.

You Can't Get Blood from a Stone

As you consider your options, assess the debtors ability to pay. If they are loaded with cash, you can have the courts attach their assets. However, if they are on the verge of bankruptcy, you may be throwing good money after bad. In the latter case, you may want to settle for less and get what you can before it's too late to get any payment at all.

When All Else Fails, Count on Karma

There are some who say that the stress you incur in chasing after debtors isn't worth it. They recommend you forget the money that is owed to you and just move on. Focus on acquiring new business and chalk the bad debt up to being a painful lesson learned.

Karma will get the bad debtor because what comes around goes around, as they say.

We are not a big fan of this approach. Bad business behavior needs to be punished or else it will continue. By chasing after the debtor for payment, they may think twice about not paying the next guy. In other words, you may be protecting another innocent entrepreneur from being abused.

But that's just our opinion - if karma works for you and you want to just walk away, go for it.

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We greatly appreciate any advice you can provide on this topic. Please contribute your insights on this topic so others can benefit.

  • Jazon posted on 8/17/2010
    How can I collect on invested money I gave to a certain business partner? My business partner took all my money away. He doesn't wanna see me again and keeps on hiding. Here's the scenario: I invested my money, roughly $500k, to fund a certain event (a concert) with my full trust that he (my partner) wants to borrow my money for the final payment of the talent fee of the artist. He told me he'll return it back to me within 3 days, after the concert. I transfer my money thru bank account transfer to his account, but after 3 days he declared the concert was a money-losing event, despite the fact that it was filled with audience in all corners of the stadium. And also one more thing, he does not allow me to check the inventory of unsold tickets or any of the documents i need to see. He's not being transparent to me. How can I claim for the money I invested? How can i demand him to pay for the money I put in to the event?
  • Ken Gaebler posted on 8/17/2010
    Ken Gaebler
    Jazon, I think you are in the Philippines, right? The 500K number had me worried, but that's about $11K in US dollars. Anyway, this article is about debt collection and what you are talking about seems more like an equity investment or a business partnership. There are different rules for that. Rather than ask for the whole amount, I suggest you ask your friend to pay you on a payment plan. If you don't get paid, one point of leverage will be threatening to tell other people and another would of course be to hire a lawyer. Next time, make sure you have a written contract and don't do business on a handshake. Good luck!
  • Gary Jaramillo posted on 1/7/2011
    Gary Jaramillo
    I had $16,000.00 on my books of uncollected debt from customers who refused to pay and I had to close my business. I tried with two letters and then on the third letter I told them I would in two weeks I would invest another $4,000.00 on them and buy big ads in all of the local newspapers and give them some free advertising that would let everyone know that they don't pay their bills. I got back all but $430.00 within 12 days. It works my friends. Believe me. Didn't have to buy one single ad in a Newspaper.
  • Ken Gaebler posted on 1/7/2011
    Ken Gaebler
    Gary, that's an interesting approach to debt collection! I'm glad it worked out.
  • Al posted on 10/12/2013
    I am importing certain home furnishing goods from oversees to USA. I have been doing business with my main vendor for the last 10 years. The business wasn't doing great but it was ok, meaning I was happy to have a job and am able to meet my daily needs. Now, suddenly my vendor was caught by law enforcement agencies abroad, for illegal activities and they got into trouble. The vendor is shut down by the government. We lost all of our customers because we have nothing to offer them. We still owe the vendor a chunk of money. Can we refuse to pay them anymore? We lost all the customers due to this corrupt illegal vendor. Can the vendor come after us when they reopen after a few months, even though we lost all our customers due to their bad business practice? Please advise.
  • Ken Gaebler posted on 10/13/2013
    Ken Gaebler
    Al, just because a vendor runs into legal problems doesn't mean you can walk away from your obligations to them, unless that was specified in a contract up front. Given their problems, it may be unlikely that they will stay in business or have the resources to chase after you, so that may work in your favor. Your best option may be to try to settle the debt for a lower amount. Otherwise, it will always be hanging over your head that they might come after you for it. Good luck.

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