Small Business Collections Guide

Unpaid invoices are a critical challenge for small businesses, with studies showing that 60% of small businesses have faced late payments that threatened their cash flow. Effective collections require a systematic approach—from prevention through contract terms to enforcement through legal action. This comprehensive guide covers every step of the collections process, from initial invoicing best practices to judgment enforcement, helping you recover the money you're owed while maintaining professional relationships. The U.S. Small Business Administration offers additional resources on managing business finances and cash flow.

Understanding Business Collections

Collections involve recovering money owed under a contract or agreement. As a small business collecting from customers or other businesses, you are the "creditor" and the person who owes you is the "debtor."

Types of Business Debts

Debt Type	Description	Collection Considerations
B2B (Business to Business)	Another business owes you	FDCPA doesn't apply, more aggressive tactics allowed
B2C (Business to Consumer)	Individual customer owes you	If using third-party collector, FDCPA applies
Services Rendered	Work completed but not paid	Document completion and client acceptance
Goods Sold	Products delivered but not paid	UCC Article 2 governs, retain security interests
Contract Balance	Remaining balance on contract	Review contract for collection terms

Prevention: Contract and Invoicing Best Practices

The best collection is the one you never have to make. Strong contracts and invoicing practices dramatically improve payment rates.

Essential Contract Terms

Every business contract should include:

• Payment terms: Clear due date (Net 30, Due on Receipt, etc.)
• Late payment penalties: Interest rate (commonly 1.5% per month or 18% annually)
• Attorney fees clause: "Prevailing party entitled to reasonable attorney fees and costs"
• Venue and jurisdiction: Which court handles disputes
• Acceptance terms: What constitutes acceptance of work/goods
• Dispute resolution: Mediation or arbitration requirements

Invoice Best Practices

1. Invoice immediately: Send invoices upon completion of work or delivery of goods
2. Be specific: Include detailed descriptions of services/products
3. Clear payment terms: State due date, accepted payment methods, and late fees
4. Multiple payment options: Credit cards, ACH, checks, online payment
5. Contact information: Make it easy to ask questions or arrange payment
6. Invoice number and date: For tracking and reference

The Collections Timeline

A systematic approach to late payments maximizes recovery while maintaining relationships:

Day 1-7 After Due Date

• Send a friendly payment reminder via email
• Reference the original invoice number and amount
• Assume they simply forgot or overlooked it
• Provide easy payment links or instructions

Day 8-14

• Follow up with a phone call
• Document the conversation in writing
• Ask if there are any issues with the invoice
• Arrange a payment plan if needed

Day 15-30

• Send a second written notice (more formal)
• Reference the late fee policy in your contract
• Set a clear deadline for payment
• Indicate next steps if payment isn't received

Day 31-45

• Suspend services or put account on hold
• Send a final notice before demand letter
• Consider whether the relationship is worth preserving

Day 46-60

• Send formal demand letter (detailed below)
• Give 10-15 days to respond
• Clearly state intention to pursue legal action

Day 60+

• File small claims court case or hire attorney
• Consider collection agency for older debts
• Report to credit bureaus if applicable

Writing an Effective Demand Letter

A formal demand letter often prompts payment without the need for court. It demonstrates you're serious and creates documentation for any future lawsuit.

Essential Components

1. Header: Your business letterhead, date, and recipient's information
2. Subject line: "Formal Demand for Payment - Invoice #[number]"
3. Background: Brief description of the business relationship and services provided
4. Amount owed: Original amount, late fees, interest, and total
5. Contract reference: Cite specific contract terms regarding payment and remedies
6. Demand: Specific amount due and payment instructions
7. Deadline: Clear date by which payment must be received (typically 10-15 days)
8. Consequences: State that you will pursue legal action, report to credit bureaus, and seek attorney fees and costs

Sample Damage Calculation

Present your demand clearly:

• Original Invoice Amount: $5,000.00
• Late Fee (per contract): $150.00
• Interest (1.5%/mo × 3 months): $225.00
• Total Amount Due: $5,375.00

Small Claims Court

Small claims court is often the most cost-effective option for collecting business debts within the jurisdictional limits.

Small Claims Limits by State

State	Limit	Business Allowed?	Filing Fee
California	$12,500	Yes (2 cases/year over $2,500)	$30-$75
Texas	$20,000	Yes	$45-$85
Florida	$8,000	Yes	$55-$300
New York	$10,000	Yes (Commercial Small Claims)	$15-$20
Illinois	$10,000	Yes	$50-$100
Pennsylvania	$12,000	Yes	$50-$115
Ohio	$6,000	Yes	$40-$65
Georgia	$15,000	Yes	$45-$55

Filing Process

1. Determine jurisdiction: File where the debtor lives, works, or where the contract was performed
2. Complete the claim form: Include the amount owed, basis for the claim, and supporting facts
3. Pay the filing fee: Typically $30-$100 depending on the amount and state
4. Serve the defendant: Follow your state's service rules (often certified mail, sheriff, or process server)
5. Attend the hearing: Present your evidence and testimony

Evidence to Bring

• Signed contract or agreement
• All invoices with proof they were sent
• Proof of services rendered or goods delivered
• Communication records (emails, texts, letters)
• Demand letter with certified mail receipt
• Payment history showing partial payments
• Calculator for interest and late fee calculations

Collecting on Judgments

Winning a judgment is only half the battle—you must then collect. Courts don't automatically collect for you.

Post-Judgment Collection Tools

Collection Method	Description	Best For
Bank Levy	Freeze and seize funds from debtor's bank account	When you know debtor's bank
Wage Garnishment	Employer withholds portion of wages (25% max federal)	Employed individuals
Property Lien	Attach judgment to real property	Property owners (wait for sale/refinance)
Debtor Examination	Court-ordered questioning about assets	Finding hidden assets
Till Tap	Sheriff collects cash from business register	Cash businesses
Business Asset Levy	Seize and sell business equipment	Businesses with tangible assets

Judgment Interest

Judgments accrue post-judgment interest until paid. Rates vary by state:

• California: 10% per year (CCP § 685.010)
• Texas: Prime + 5% (Finance Code § 304.003)
• New York: 9% per year (CPLR § 5004)
• Florida: Variable rate set quarterly
• Illinois: 9% per year (735 ILCS 5/2-1303)

Judgment Renewal

Judgments expire after a period of years. Most states allow renewal:

• California: 10 years, renewable once
• Texas: 10 years, renewable indefinitely
• New York: 20 years
• Florida: 20 years (5 years for small claims)

Alternative Collection Strategies

Payment Plans

Sometimes a structured payment plan is more effective than aggressive collection:

• Document the payment plan in writing
• Include a clause that default accelerates the full amount
• Set up automatic payments when possible
• Consider reducing interest or late fees as incentive

Negotiated Settlements

Accepting less than the full amount may make sense when:

• The debtor has limited assets
• Collection costs would exceed the amount recovered
• Speed of payment is more valuable than full payment
• The debtor disputes part of the amount owed

Typical settlement: 50-80% of the original amount for immediate payment.

Collection Agencies

Third-party collection agencies can be effective for older debts or when you lack time to pursue collection yourself:

• Contingency fees: Typically 25-50% of amount collected
• Best for: Older accounts you've exhausted efforts on
• Caution: Ensure the agency is licensed and follows FDCPA if collecting consumer debts

Selling the Debt

Debt buyers purchase delinquent accounts for pennies on the dollar (typically 4-10%). Consider this when:

• The debt is very old
• You need immediate cash
• Collection efforts have failed

Statute of Limitations

You must file suit before the statute of limitations expires:

State	Written Contracts	Oral Contracts	Open Accounts
California	4 years	2 years	4 years
Texas	4 years	4 years	4 years
New York	6 years	6 years	6 years
Florida	5 years	4 years	4 years
Illinois	10 years	5 years	5 years
Ohio	8 years	6 years	6 years

Legal Considerations

When to Hire an Attorney

Consider professional legal help when:

• The amount exceeds small claims limits
• The debtor has filed for bankruptcy
• Complex legal issues are involved
• You need to pierce the corporate veil
• Collection requires out-of-state action

Mechanics' Liens for Contractors

If you're a contractor, supplier, or subcontractor, mechanics' liens provide powerful collection leverage:

• File within statutory deadlines (typically 30-90 days from completion)
• Preliminary notices may be required (varies by state)
• The lien attaches to the property itself
• Foreclosure can force sale of the property

Personal Guarantees

When dealing with business entities, personal guarantees from owners provide additional collection security:

• Allow collection from individual assets if business fails
• Survive corporate dissolution
• Should be in writing and clearly stated

Frequently Asked Questions

How long should I wait before taking legal action?

Most collection experts recommend sending a formal demand letter 45-60 days after the invoice due date if informal collection attempts have failed. File suit within 30 days of the demand letter deadline if there's no response. Waiting longer allows evidence to go stale and debtors to dissipate assets.

Can I charge late fees and interest?

Yes, if your contract provides for them. Without a contract, you can typically charge the statutory interest rate for your state. Common contractual late fees are 1-1.5% per month (12-18% annually) plus a flat late fee of $25-50. Courts may reduce excessive fees.

What if the debtor disputes the amount owed?

Document your response to the dispute and request specifics about what they contest. If the dispute is legitimate, consider negotiating. If frivolous, proceed with collection. Courts will resolve disputed amounts—don't let an unfounded dispute stop your collection efforts.

Should I accept a partial payment?

Generally yes, but protect yourself: (1) document that you're accepting it as partial payment, not settlement in full, (2) note it on the endorsement when depositing checks, and (3) send written confirmation of the remaining balance. Be aware that in some states, accepting a partial payment can restart the statute of limitations.

Can I report the debt to credit bureaus?

If you're collecting your own debts (not using a collection agency), you generally cannot report directly to credit bureaus. However, once you obtain a judgment, the judgment becomes public record and typically appears on credit reports. Collection agencies you hire can report debts to credit bureaus.

What if the debtor files for bankruptcy?

Stop all collection activity immediately when you receive notice of a bankruptcy filing. The automatic stay (11 U.S.C. § 362) prohibits collection efforts. File a proof of claim in the bankruptcy case to preserve your right to any distribution. Consult a bankruptcy attorney for significant debts.

How do I collect from an out-of-state debtor?

Options include: (1) sue in your state if your contract has a venue clause or if the debtor transacted business there, (2) sue in the debtor's state, or (3) obtain a judgment in your state and domesticate it in the debtor's state. For small amounts, small claims court in the debtor's state is often most practical.