Many organizations and commonly small businesses will attempt to get customers to pay on outstanding invoices through various methods. However, for a wide range of reasons, small businesses can struggle to get timely payments, which ultimately affects cash flow.

One method that many small businesses have employed over the years is taking customers to small claims court. It’s relatively inexpensive to file a claim, and if you have paperwork to back up your claim, your business will often achieve a favorable judgment. That’s good news.

The bad news? A small claims judgment is just that, an order from the court for the client to pay your business. And for the most part, the authority ends there.

In short, it becomes your responsibility to enforce that judgment.

Here are some reasons why taking customers to small claims court may not be the best solution to collect outstanding debt.

Difficulty enforcing judgments

Even if your business successfully obtains a judgment in small claims court, enforcing that will be a challenge. The court may not have the authority to compel that customer to make a payment which then leaves your business responsible for pursuing that payment. Some businesses pursue additional legal action to try and enforce the judgment which can include garnishing wages or seizing assets. But historically, small claims judgments have been difficult to enforce.

Your time and your money

Going to small claims court is meant to be straightforward and cost effective, but many times it’s the opposite. Depending on the state you’re filing the claim in, the filing fee can be relatively low. However, the time you spend preparing and even going to court can prove to be not worth it. Many times, you can spend an entire day waiting for your case to be called. If the person you’re filing a claim against is unwilling or unable to pay you, even after you obtain a judgment, your business could end up spending even more time and money trying to collect the debt than the debt is actually worth.past due bill envelop

Limited jurisdiction

There is limited jurisdiction when it comes to small claims court. First, when you file a claim in small claims court, like most courts there is a jurisdiction such as the county or state of the court. That typically means if the individual you are filing a claim against is either not residing in the state or recently left the state, a judgment is ineffective. Also, some small claims courts have limits on the maximum amount of money that can be awarded in a judgment. If the debt exceeds the limit of the court, your business may need to pursue other legal avenues which can be far more costly.

Limited remedies in small claims court

In short, there are very limited solutions when it comes to obtaining a judgment in small claims court. The one tool the court does have is to rule in the business’s favor. In some jurisdictions the court may award interest or additional fees but that’s where the process ends. A judgment is a piece of paper that says the individual owes someone money and it is up to you to enforce that judgment. Again, courts vary according to jurisdiction but in most cases, you’re left with the enforcement of that judgment.

Damaging relationships with customers

If you take a customer to a small claims court, you can rest assured that you’ll probably never do business with that individual again. And the damage to your reputation may spread to other people they know. If you’re running a dental office in a local community and you have a reputation of taking patients to court, your practice may just get that reputation.

Debt collection strategies instead of small claims court

While small claims court can be a useful tool in some situations, it’s best for your business to implement more effective debt collection strategies.

First, your business should make sure you have solid internal accounts receivables procedures. That starts right at the beginning of the relationship with your customer with payment expectations and an understanding of how and when you will need to be paid.

Your business should have a method for dealing with late and non-paying customers including regular statements and gentle reminders by phone.

If there is a dispute, you should amicably try to resolve that disagreement with diplomacy.

If you’ve tried all you can internally then the best approach is to work with a third-party debt collection agency. Collection agencies have a multitude of ways to resolve your dispute with your customers. That includes regular contact, negotiation strategies, diplomatic and tactful communications as well as other tools such as credit reporting.

Unlike small claims court, a professional debt collector can work with your customer or patient and together they can come up with a resolution.

If you’ve used the small claims court process and have found it ineffective, your best option is to work with a reputable collection agency.

Published On: March 15th, 2024Categories: Accounts Receivables, Collection, Small Business Collections

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