The Link Between Accounts Receivable, Debt Collectors and Insurance Claims

April 29, 2013

When sending a client to collections backfires professional liability insurance can help.

For small businesses, an unpaid invoice or outstanding receivable can be the difference between a great month and a lean one.  Too many accounts receivable could even push your business into insolvency.  For these reasons many business owners use a contract, collect an up-front deposit, or build milestone payments into projects.  Even without a contract you have the right to be compensated for your time and effort, as clients knowingly enter into verbal agreements and therefore are liable for upholding agreement terms.

No matter what measures you take ahead of time, it’s possible – even likely – that at some point you will have a non-paying client.  Let’s say you’ve mailed the initial invoice, sent a couple of follow-up invoices, e-mailed to inquire about payment, and left one or more voice mails, all with no resolution.  What else can you do?

At this point many small businesses turn to a collection agency, handing over the hassle of collecting in exchange for a fee or percentage of the debt.  While sending a non-paying client to collections can seem like the logical next step, it may have negative repercussions.  Taking legal action does indeed force your client to respond, but that response may not be the payment you expect.  In many instances the client, feeling slighted, will file a lawsuit for negligence or other claims that, even if not true, could damage the image of your small business.

And that’s where professional liability insurance coverage comes in.  It protects your business if you are sued for negligence, even if you haven’t made a mistake, and picks up post-deductible defense costs for covered claims that are often substantial.

Insurance for small business comes in handy in so many ways.  You never know when you might need it.