The last problem the small business owner wants is late or non-paying customers. Payment-on-delivery is common for retail firms, but most other small enterprises have to extend credit to clients to attract customers. But there are steps you can take before the sale to avoid collection headaches and bad debt on your books.

When you extend credit to your customers, the small business owner is essentially becoming a banker. So you have to think like a banker, advises attorney Chris Kelleher.

“Banks have forms that you have to fill out. They check your character, your credit, and your collateral. They make you sign all kinds of things. They may make you put your house on the line, before they give you credit. So the best advice I can give to business owners is remember you’re a banker now.,” Kelleher said.

The first step for a business extending credit is to establish a credit policy. Few entrepreneurs launch their firms with the goal of becoming collection agents and some pre-planning can minimize this unsavory business reality. Your type of business and industry may be the most important factor in what type of terms and account options you offer clients. Start with the standard in your industry and then adjust it to suit your operation. Here are some important processes to consider:

§ Get Solid Credit Application Forms–Good credit information will give you the opportunity to check the potential risks. Be sure to check their references. It may do more than alert you to financial issues but also to customer service concerns that past vendors have encountered and allow you to deliver better service.

§ Business Procedures Support Collections–Work orders, contracts, and agreements with customers should list the services and work to be delivered and the terms of payment. A consistent accounts receivables process with signed documentation by the client will go a long way in getting you paid on time and keeping customers happy.

§ Use Late Payment Fees–Create an incentive for clients to pay on time. Often customers cannot pay all their debts, but late payment fees increase your chances your invoice will be at the top of their pay list. Late fees can also be a tool that brings potential collection problems to light faster.

§ Follow-Up with Late Customers–It is important to consistently follow up with late customers. This will give you some idea of whether you will be able to collect the payment or will need to turn it over to a debt collection agency or your attorney. Always warn the client they are forcing you to “bring in a third person” to assist in resolving the payment issue.

§ The Longer It Takes To Collect, the More Difficult–The longer the debt is on your books the harder it is to collect. It is a good idea to have a ‘dead beat clause’ in your contracts that stipulates clients will pay all legal fees if you are forced to sue them for non-payment. Arbitration may get you some of your money faster if the agreement or contract is disputed.

§ Know When To Cut Your Losses–Don’t throw good money after bad. Don’t cut your throat by trying to keep a customer who will not pay you for the goods and services you have delivered.

Kelleher says the last tip is often the most difficult for entrepreneurs, but he stresses it is important to know when to cut the cord with non-paying customers.

“Let the deadbeat client go bankrupt your competition, but protect your firm,” Kelleher warns business owners reluctant to cut ties with bad clients.

These basic steps won’t guarantee payment on time, but will help you collect with stubborn payers and spot high-risk clients. Unfortunately, dealing with bad debt is a problem most firms will face at some time.