All businesses need to turn unpaid invoices into payments to earn enough for paying bills and employees. However, small businesses, especially those run by business owners with limited credit options, are hit the hardest when they don’t get paid on time.

Using the right debt recovery techniques helps keep your business’ cash flow steady and limits how much you end up qpending to collect your money. Taking steps early, rather than waiting months to try to track down a payment, is key no matter which methods you choose to use.

Send Warnings Early
Waiting until a payment is six months or a year late leaves you with a serious gap in your accounting books and makes it less likely that your client, purchaser or supplier will resolve the issue. Begin a practice of sending out neutral late payment warnings as soon as the due date on the invoice passes recommends Darrell Zahorsky at About.com. This allows clients who have simply forgotten about their debt to pay without penalty and doesn’t ruin your relationship, encouraging further business. It also gives you concrete proof that you made a fair attempt to collect on the bill before taking any legal action, which is required in many states.

Follow Up With Stronger Wording
A letter of demand is the next step when your politely-worded requests for payment fall on deaf ears. The stronger wording and strict deadline for payment is backed up by any proof you have of the debt, including contracts, receipts and communication from the debtor, according to Australian Debt Recovery Services. Be careful not to make any threats or use inflammatory language in this letter as both can be considered harassment. A clearly written and professional letter of demand also demonstrates that, despite your business’ small size, you take being paid on time and in full seriously. Stating that you will follow up with legal action or by enforcing a fair late fee for each week or month that the bill remains unpaid is allowed. Check your state laws before instituting a late fee unless it was part of the original contract – in some areas this is illegal.

Take Legal Action
When your notifications through mail, email and phone don’t produce results it is time to consider which avenue of legal action will work best. Smaller debts that don’t make much of an impact on your business’ bottom line should probably just be written off at this point. There’s no reason in paying for a lawyer or for court fees if these costs would be higher than the amount you’d receive. Small claims court is an inexpensive way to sue for a debt, but the low court costs are accompanied by limits on how much money you can sue for. In small claims court you have the option of representing yourself and you’ll need clear proof that the defendant didn’t pay you as agreed. More serious legal action for large or unusual debt recovery requires the help of a lawyer. Mediation is another method, but it may end with you forgiving at least part of the debt. Costs for these programs also run high unless you find a volunteer mediator or arbitrator through a local business organization. The decisions made in mediation are rarely legally enforceable as well.

Choose Debt Collectors
If you don’t want to bother with going to court a debt collection agency may provide the best results, even on large or difficult to collect outstanding payments. Trained debt collectors contact the client or buyer you’re having trouble with so you don’t have to waste your time making daily phone calls to encourage prompt payment. A debt collection agency will work for weeks or months on each case to resolve it. In many cases debt collection is more effective than outright legal action because your lawyer won’t make daily calls to the debtor. Debt collection is also an option if legal action didn’t work due to technicalities. Look for a debt collection agency that understands the Fair Debt Collections & Practices Act. This act made it illegal for collectors to lie, threaten or harassment people they are contacting. The best agencies make it clear that they follow these rules in all collection cases.

All of these techniques and ideas work together as an action plan to solve small business debt collection issues. Knowing which steps to take helps alleviate some of the stress and anxiety created in a small business by outstanding debts. You can pick one or more method for dealing with an existing issue, but considering implementing a system that involves all four steps for future payment problems. This gives you a clear plan of action when a due date arrives on a bill or invoice and there’s no check in your mailbox.

Gretchen Baumgartner is a freelance writer with over 10 years experience in the financial services industry. She enjoys writing about small business finance and lives in Colorado with her husband and 2 dogs.

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• avenues for small business for unpaid bills Australia
• business action plan to recover outstanding payments

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