As an MSP owner or financial administrator, dealing with unpaid invoices can be one of the most challenging aspects of running your business. Whether you’re a technical founder who’s scaled your MSP from a one-person shop or a bookkeeper trying to maintain healthy cash flow, the decision to send a client to collections is never easy. This guide will walk you through the essential steps to take before making that final decision.
Disclaimer: This article provides general guidance and best practices for MSPs considering collections actions. As laws and regulations vary by jurisdiction, we strongly recommend consulting with qualified legal counsel before implementing any collections process. This content should not be considered legal advice.
Starting with the Basics: Documentation is Your Best Friend
If there’s one thing technical professionals understand, it’s the importance of documentation. Just as you document your network configurations and security protocols, maintaining detailed records of client interactions and financial transactions is crucial. Before considering collections, ensure you have:
- Complete service delivery records
- Signed contracts and agreements
- Payment communication history
- Accurate invoice records
- Written documentation of verbal agreements
- Proof of service delivery
Think of this documentation as your system backup – you hope you’ll never need it, but you’ll be grateful it exists if you do. Keep detailed service records, maintain copies of all signed contracts, and preserve every invoice and proof of delivery. If you’ve had any verbal agreements about payment terms or special arrangements, get them in writing. In the collections process, undocumented agreements might as well not exist.
Communication: The Human Approach to Resolution
Just as you wouldn’t immediately escalate a minor technical issue to level 3 support, sending a client to collections should never be your first response to a late payment. The most effective approach often starts with a simple phone call. Before making that call, take a moment to center yourself – remember that late payments can be embarrassing for clients and might indicate underlying financial hardships. Approach the conversation with empathy rather than accusation.
When you reach out, simply ask why the payment is late and work with them to establish a realistic timeframe for payment. Your tone during this conversation is crucial – an accusatory or angry approach will likely trigger defensiveness and make resolution more difficult. Instead, listen actively and show understanding. This human-to-human connection often resolves issues more effectively than automated reminders ever could.
Implement a structured reminder system that starts when the invoice is created. Send an initial notification with the invoice, a reminder on the due date, and follow-up reminders every 7 days thereafter. Once an invoice reaches 30 days past due, transition to sending monthly invoice summaries that show all outstanding balances. Search for a system to automate this process, so that this consistency is not forgotten and is actually fully automated. Dunning emails is a very well known process that many companies follow, no matter how large or small.
The Internal Review: Your Pre-Flight Checklist
Before proceeding to collections, conduct a thorough internal review. Think of it as running diagnostics on a system before a major upgrade. Verify that all charges are accurate, confirm compliance with service level agreements, and check for any unresolved service tickets that might justify payment delays.
Review your costs versus potential returns. Collections agencies do charge significant fees, and some debts might not be worth pursuing. Consider the lifetime value of the client relationship and the potential impact on your reputation in the business community. Generally, collections agencies will charge you 30-50% of the recovered amount. This is perceived as “found” money and should be viewed in a similar lens.
Legal Considerations: Navigate the Compliance Landscape
The legal landscape of collections can be as complex as managing multiple cloud environments with different security requirements. Each state has its own debt collection laws, and federal regulations add another layer of complexity. This is where that earlier disclaimer becomes particularly relevant – consulting with legal counsel isn’t just recommended, it’s often essential. However, you do need to be apprehensive as legal costs add an additional cost to this process, while a collections agencies handle a lot of this internally and have all of their policies and procedures well-documented and in-line with the regulatory environment.
Verify the statute of limitations for debt collection in your jurisdiction, ensure compliance with all relevant laws, and review your contracts’ terms regarding collections and late payments. If your client has filed for bankruptcy or is subject to legal holds, you’ll need to navigate additional requirements. Many of these complex circumstances are best handled by a collections agencies, as the legal costs can be hugely punitive.
Collections: The Last Resort
It’s important to recognize that sending a client to collections will likely permanently damage your relationship with them. In rare cases, it could even lead to reputation damage through negative reviews or word-of-mouth. This is why collections should truly be your last resort, used only after exhausting all other options for resolution. That said, customers do respect and understand the challenge that some customers may put you in.
Working with Collections Assist by Alternative Payments
When you’ve made the difficult decision to proceed with collections, Collections Assist by Alternative Payments offers a streamlined solution specifically designed for MSPs. The process is straightforward: simply notify Alternative Payments of the invoice(s) you want to send to collections and provide any supporting documentation. The team immediately begins work using industry-standard best practices for business collections.
Thanks to the collective volume of collections from multiple MSPs, they offer discounted rates that individual MSPs might not be able to secure on their own – a perfect example of strength in numbers. This partnership ensures professional handling of your collections while minimizing your costs, both manual and legal. Additionally, Alternative Payments’ team will keep you up-to-date on everything that transpires.
Conclusion
The decision to send a client to collections is significant, but with proper preparation, documentation, and a human-first approach to communication, you can navigate the process professionally and effectively. Use each experience as an opportunity to improve your business processes, whether that means implementing stronger credit checks for new clients, clearer payment terms in your contracts, or more robust internal procedures for handling late payments.
Remember to consult with legal professionals for guidance specific to your situation and jurisdiction. By following these steps and maintaining thorough documentation throughout the process, you’ll be better positioned to recover unpaid fees while minimizing potential legal and operational risks.
If you decide to pursue a collections strategy, work with a team that you trust and knows has your best interest at heart. Collections is a challenging experience across the board, but working with other companies and firms can be hugely beneficial.
