By: AllBusiness.com

Extending credit is a necessary part of many businesses, and the process often includes collections. When your business extends credit to other businesses directly, you become their creditor. Being a creditor is easy, as long as your customers are paying what they owe you on time. When they stop paying as agreed, the hard work begins.

When someone owes you money, try not to take it personally. Writing off a small amount of bad debt every year is inevitable, and understanding this from the start will make the rest of the process easier. Think of it as similar to having a small amount of inventory that won't sell and must be written off.

Before you grant credit, ask your customer to fill out a credit application and credit agreement. Standard forms are available on AllBusiness.com. If you eventually have to take legal action to pursue collections, a signed application and credit agreement will make the process more effective.

If you have customers who are not paying past bills but offer to buy your goods or services COD, consider taking them up on it. After all, you are in business to generate profitable sales. Take comfort in knowing you are continuing to earn profits from the customer.

Weigh the overall amount of bad debt your company has in its accounts receivable with the total A/R. If the percentage is small, you might simply factor this loss into your cost of doing business. There is a saying among bankers that if you have no losses in your loan portfolio, perhaps you aren't making enough loans. This doesn't mean you should loosen your credit standards to the point of having significant losses, but consider that you may be losing profitable business by not granting enough credit. Many businesses operate year after year with less than 3 percent bad-debt write-off. Smart business owners understand they must consider this when setting prices for products or services.

If a significant number of your customers are not paying, consider using a collection agency that will report to Dun & Bradstreet or other business credit reporting agencies. Coface is a global credit insurer that writes credit insurance policies for small, medium, and large companies. It also has its own collections group. Depending on your industry, Coface can be very effective in collections because it will flag your deadbeat account and not allow it to be an eligible credit insurance debtor. Once customers pay, Coface upgrades their payment records, which benefits the nonpaying customers as well as your business.

If your company has a small problem and your overall nonpaying accounts are minimal, ask your attorney to write demand letters to deadbeat accounts, demanding they fulfill their contractual payment obligations. (This is where your credit agreement comes in handy.) Litigation is seldom cost-effective for companies trying to collect, but some use small claims court and represent themselves. Even if you are successful in getting a court judgment, you still have to take the judgment and find enough of your customer's business assets to make the entire process worthwhile.

In the final analysis, business owners must consider the real costs of chasing a deadbeat customer as well as the lost productivity from allocating resources to collecting potentially uncollectable money. Making cool-headed business decisions is the best way to approach this difficult task.

Sam Thacker is a partner in Austin, Texas-based Business Finance Solutions.

AllBusiness.com operates one of the Web's premier business sites, providing practical information and services for business professionals and growing businesses. See more at www.allbusiness.com.