AR collections for a small business, step by step
Key takeaways
Put every invoice on the same schedule: a reminder before the due date, follow-ups at 7 and 14 days late, a final notice at 30.
The federal FDCPA applies to consumer debts, not money owed for business purposes. Your state may still have its own rules.
Small claims limits: $20,000 in Texas justice court, $8,000 in Florida, $15,000 in Georgia magistrate court.
One commercial agency lists 25% of what it collects on balances of $3,000 to $9,999, and nothing if it collects nothing.
What is an AR collection?
An AR collection is the follow-up that turns an open invoice into money in the bank. Accounts receivable is what customers owe you for work already delivered. Collections is everything you do after the invoice goes out to get it paid.
In a business with a handful of clients, AR collections is usually one person, a spreadsheet and a calendar reminder. That works if the steps are written down. It breaks when chasing depends on someone remembering, or feeling brave enough to pick up the phone.
Are AR and collections the same thing?
Not quite. AR is the balance; collections is the activity. Your AR ledger lists every unpaid invoice, current or late, and collections starts when one of them passes its due date, or just before.
The word also gets used for the later stage, when a debt goes to an agency. Inside a small business it means the whole run, from the first friendly reminder to the decision to escalate. Handling the early steps yourself costs time, not a percentage of the invoice.
What is the AR collection process?
A workable process has six steps, each on a set day, with every contact logged against the invoice. Here is the schedule we suggest for net 30 terms.
- Before the work starts. Put payment terms, the due date, any late fee you charge and the name of the person who approves invoices on the client side in writing.
- Invoice day. Send the invoice to whoever pays, not only whoever ordered. Add a pay link and their PO number if they use one.
- Three days before the due date. A short, friendly reminder. Plenty of late payments are an invoice stuck in someone's inbox.
- 7 and 14 days late. A payment reminder email, then a phone call. Ask one question: when will this be paid, and by whom?
- 30 days late. A final notice letter with a firm date and what happens after it.
- After that date. Decide: payment plan, demand letter, agency, small claims, or write-off. Don't let the invoice drift.
| Days from due date | Step | Channel |
|---|---|---|
| 3 days before | Courtesy reminder | |
| 7 days late | First follow-up | |
| 14 days late | Call the payer | Phone, then an email recap |
| 30 days late | Final notice | Email and mail |
| About 45 days late | Escalate or write off | Your decision |
Move the days to fit your terms. Net 15 squeezes everything closer; net 60 stretches it. What matters is that the dates are set before anyone is annoyed.
Which AR numbers should a small business track?
Three are enough: how much is late, how late it is, and how long you wait on average to get paid.
- Aging buckets. Group open invoices as current, 1 to 30, 31 to 60, 61 to 90 and over 90 days late. Most accounting tools print this as an aging report.
- Days sales outstanding (DSO). Accounts receivable divided by credit sales for the period, times the number of days in the period. If DSO creeps up for a few months running, collections is slipping even when no single invoice looks alarming.
- Your five biggest late balances. Client, amount, days late, last contact, next step. Read it every Monday.
Old invoices get harder to collect. Contacts leave, records go missing and the client's cash goes to whoever pushed harder. That is why the 61 to 90 bucket deserves more of your attention than the current one.
When should you hand an invoice to an agency or small claims court?
When your own steps have run out and the client has gone quiet, or keeps missing dates they set themselves. Which route fits depends on the amount, the paperwork and how much of the balance you want back.
| Option | What it costs | Fits when |
|---|---|---|
| Keep chasing yourself | Your time | The client still answers and the amount is small |
| Collection agency | A share of what is collected. One commercial agency lists 25% on $3,000 to $9,999 and 20% on $10,000 to $49,999, with no fee if it collects nothing | You have many accounts, or a debtor you can't find |
| Small claims court | A filing fee plus service. Limits: $20,000 in Texas justice court, $8,000 in Florida, $15,000 in Georgia magistrate court | One clear debt with a signed agreement or good records, under the limit |
| Easy Small Claims | $99 to start, $299 through the hearing. Collection steps quoted separately. No cut of what you recover | You want the demand letter and filing handled, and someone from your business can attend a hearing if it gets that far |
| Write-off | The balance | Chasing would cost more than it brings back |
Agencies and small claims are not rivals. An agency suits volume and debtors who have moved; court suits one clear debt with good paperwork. Our cost comparison of agency, small claims and lawyer runs the numbers on an $8,000 invoice, and Easy Small Claims or a collection agency walks through which one fits your invoice. The Texas State Law Library explains what counts toward the Texas limit.
A note on rules: the federal Fair Debt Collection Practices Act applies to consumer debts, those incurred for personal, family or household purposes. It does not apply to debt owed for business purposes. Your state may have its own rules, so check them before you escalate.
What happens if an invoice can't be collected?
At some point you stop spending time on it and write it off. That is a bookkeeping and tax step.
Under IRS Topic 453, a business bad debt can be deducted only if the amount was already included in your income. If you use the cash method, the IRS says you generally can't deduct unpaid fees, because you never reported them. If you did report the invoice as income, the debt has to be worthless and you need to show reasonable steps to collect it. The IRS also says you don't have to go to court first if a judgment would be uncollectible. Your accountant can tell you how this applies to your books.
Before writing anything off, check the invoice date. Every state sets a deadline for suing on a debt, and an invoice left long enough can run past it.
Last updated October 2026. Easy Small Claims is not a law firm and this page is general information, not legal advice.
Questions, answered
What is an AR collection?
An AR collection is the process of getting customers to pay invoices they owe for work already delivered. For a small business it usually means reminders before and after the due date, a phone call, a final notice, and then a decision: offer a payment plan, escalate to an agency or small claims court, or write the balance off.
Are AR and collections the same thing?
They overlap but are not the same. Accounts receivable is the money customers owe you, current and late. Collections is the work of getting the late part paid. In a small business one person often handles both, which is why a written schedule helps: chasing stops depending on memory or mood.
What is the AR collection process?
A simple AR collection process for net 30 terms: a courtesy reminder three days before the due date, follow-ups at 7 and 14 days late including a phone call, a final notice at 30 days, then a decision at about 45 days. Log every contact against the invoice so you have a record if it ends up in court.
What happens when accounts receivable are collected?
When a customer pays, the invoice is closed in your books: accounts receivable goes down and cash goes up by the same amount. If an agency recovered it, the agency's fee comes out of the payment. If the debt is never collected, you write it off, and your accountant can tell you whether a tax deduction applies.
A small business owner himself, Nitin has been on the wrong end of an unpaid invoice and knows how easy it is to give up on one. He built Easy Small Claims so owners can get that money back. He is also a practicing barrister.