What is debt collection & how does it work?

Most UK businesses lose £15,000 GBP+ annually to unpaid invoices, and the majority don't have a systematic credit collection procedure. 

Are you among the many who struggle with the legal requirements of debt collection, balancing firm collection with customer retention, and implementing systematic, repeatable processes?

This comprehensive guide will equip you with a complete credit collection framework, offering insights into legal compliance, practical templates, and automation strategies to improve cash flow without damaging crucial business relationships.

What does debt collection mean in finance?

For businesses, effective debt collection is vital for maintaining liquidity and profitability. Unpaid debts can severely impact a creditor's cash flow and bottom line.

Effective debt collection processes are essential for recovering outstanding receivables, minimizing bad debt write-offs, and ensuring the timely return on invested capital. This process often involves the creditor's initial attempts to collect, followed by the engagement of specialized third-party debt collection agencies if internal efforts prove unsuccessful. 

These agencies employ various strategies, including communication through phone, mail, and email, and may escalate to legal action to secure the full repayment of the principal debt, accrued interest, and applicable fees. 

Optimizing debt collection and recovery is a critical component of financial risk management. It safeguards a business's assets and promotes overall financial stability.

Benefits of effective debt collection:

1. Improved cash flow: Prompt and efficient collection of outstanding debts ensures a consistent and predictable influx of funds, which is vital for maintaining operational stability, funding new initiatives, and facilitating long-term growth.
2. Maintained customer relationships: Implementing a systematic, transparent, and respectful collection process is key to recovering outstanding dues while simultaneously preserving positive relationships with valuable customers, encouraging future business interactions.
3. Legal compliance: Strict adherence to all relevant legal requirements and ethical guidelines during the debt collection process is crucial for minimizing the potential for disputes, avoiding costly legal ramifications, and protecting the company's reputation.

Now we've clarified what debt collection means in finance. Now, let's talk about how getting proactive can be your secret weapon in the whole process.

Be proactive with debt collection right before your first invoice

A well-defined credit policy acts as the first line of defense against late payments, establishing clear expectations and mitigating risks before they arise. 

It provides a structured framework for extending credit, ensuring consistency and fairness, and reducing the likelihood of disputes or misunderstandings that often lead to delayed payments. 

By proactively addressing creditworthiness and payment terms, businesses can significantly improve their cash flow and reduce the need for intensive debt collection efforts down the line.

Elements of a UK credit policy

Businesses need a strong credit policy that fits UK law. Key elements include:

1. Running credit checks on new clients: Before extending credit, conducting thorough credit checks on new clients helps assess their financial stability and payment history. This proactive step allows businesses to identify potential risks and adjust credit limits or payment terms accordingly, minimizing exposure to bad debt.
2. Setting clear payment terms (e.g., Net 30, Net 60): Clearly defined payment terms, such as Net 30 (payment due 30 days after the invoice date) or Net 60, remove ambiguity. These terms should be communicated clearly in all contracts and invoices, ensuring both parties understand their obligations.
3. Including a "Right to charge interest on late payments" clause in contracts: Under the Late Payment of Commercial Debts (Interest) Act 1998, businesses have a statutory right to charge interest on overdue commercial debts. Including an explicit clause in contracts referencing this Act serves as a strong deterrent against late payments and provides a legal basis for claiming compensation for delayed funds.
   
   

How do debt collections work? 5 steps in the debt collection process

Debt collection is a process that begins when a creditor hires a collection agency to recover an unpaid debt. The debt collection process can be stressful and challenging for debtors, but it is important to understand the steps involved in order to protect your rights.

This section will provide an overview of the five main steps in the debt collection process:

1. Initial contact

The debt collection agency will initiate contact with the debtor, typically through a formal letter or a phone call. This communication serves to inform the debtor about the outstanding debt, its amount, and the creditor to whom it is owed.

The collector will request prompt payment of the debt in full. It is crucial for debtors to verify the legitimacy of the debt and the collection agency before proceeding.

Debt collection agencies must evaluate legal risks, such as debt age and statute of limitations, and comply with consumer protection laws. Key risk management procedures include thorough documentation, regular compliance training for agents, clear dispute resolution mechanisms, ongoing legal counsel review, and internal audits. 

Before debt collection, assess the debtor's financial risk, including their capacity to pay, legal costs, and recovery likelihood. Set clear collection investment limits based on this assessment to ensure cost-effective efforts that don't exceed potential returns, safeguarding financial resources.

2. Negotiation and communication

Debt collectors may be open to negotiating payment arrangements with the debtor.

This could involve creating a structured payment plan that aligns with the debtor's financial capabilities:

1. The collector might also consider settling the debt for a reduced amount.
2. Effective communication and cooperation between the debtor and the collector are essential during this phase.
3. Debtors should explore all available options and document all communication with the collector.

Maintaining a positive brand image and fostering strong customer relationships are paramount during debt collection. Businesses should:

1. Prioritize respectful communication, even when dealing with difficult situations.
2. Offer flexible solutions and payment arrangements where possible.
3. Train staff to handle disputes professionally and empathetically.

These practices not only help recover debts but also safeguard the company's reputation and ensure long-term customer loyalty.

3. Legal action and litigation

If the debtor fails to respond to the collector's attempts at contact or neglects to adhere to agreed-upon payment terms, the collector may pursue legal action:

1. This typically involves filing a lawsuit against the debtor in court.
2. The debtor will receive a formal notice of the lawsuit and will have the opportunity to respond and present their case.
3. Legal representation may be beneficial for debtors facing a lawsuit.

Businesses should consider obtaining appropriate insurance coverage, such as professional liability insurance or errors and omissions (E&O) insurance, to protect against potential legal claims arising from debt collection activities. These policies can help cover legal fees, settlements, and judgments in the event of a lawsuit, mitigating financial risks and safeguarding the company's assets. 

4. Judgment and court order

If the court rules in favor of the debt collector, a judgment will be issued against the debtor.

This judgment legally obligates the debtor to pay the outstanding debt, potentially including additional interest, fees, and court costs. The debtor's credit report will likely be negatively impacted by the judgment.

5. Enforcement and collection

If the debtor fails to satisfy the judgment, the debt collector can pursue various enforcement measures to collect the debt.

These measures may include:

1. Wage garnishment: A portion of the debtor's wages is withheld by their employer and remitted to the collector.
2. Bank account levy: Funds are directly seized from the debtor's bank account.
3. Property liens: A lien is placed on the debtor's property, potentially preventing its sale or transfer until the debt is paid.
4. Asset seizure: In certain cases, the collector may be authorized to seize and sell the debtor's assets to satisfy the debt.

When is the right time to escalate a late payment to a debt collection agency?

While it might seem like escalating an unpaid invoice to a debt collector is a worst-case scenario, it’s more productive to think of it as just another tool in your credit control toolkit. As with all tools, you need to know how, and when to best use them. 

Escalating to a debt recovery service too early can put a strain on the relationship you have built with your customer. But, using the tool correctly, and escalating the invoice at the right time is in many cases the difference between getting the invoice paid, and writing the debt off.

So, when is the collection process for overdue balances started? Let’s take a look.

To help you understand when the best time to engage in debt recovery services is, we’ve put together a timeline below for effective debt recovery:

1-3 days after invoicing

If your company has provided a service or product and payment isn’t immediately forthcoming, it can be tempting to immediately reach for the big guns, especially if that unpaid invoice is crucial to your cash flow. 

It can be easy to embrace the worst-case scenario and assume you’re never going to get paid. However, it’s worth remembering that genuine mistakes do happen.

Once your payment deadline has passed, don’t be afraid to send a firm, but polite and still friendly, email requesting payment. Ask your client to contact your company if they are having trouble paying. Remember to attach a copy of the original invoice.

7 days after invoicing

After seven days, it’s time to apply a little more pressure. Contact your client again with a slightly more sternly worded email informing them that their payment is still outstanding. Give them a set period to make payment before you further escalate the matter. 14-days is reasonably standard.

To apply a little more gentle pressure, you can also state that, as per the Late Payment of Commercial Debts (Interest) Act of 1998, you have the right to claim late payment interest and compensation covering the “reasonable costs” incurred while recovering the debt.

21 days after invoicing

After 21 days, it’s best to deploy the personal touch. Emails are easy to ignore; phone calls are not.

Contact your client directly or escalate it to a senior member of staff. During the call, remain polite and empathetically, but stress that this is the last chance for your client to arrange for payment to prevent further escalation. For guidance, we’ve prepared 6 phone call scripts that help get invoices paid over the phone.

You have the discretion to allow more time to facilitate payment, but you are also entirely within your rights to contract debt recovery services if payment isn’t made.

More than 30 days after invoicing

More than 30-days is usually considered to be the rubicon when it comes to unpaid debt. If your client has ignored all other payment requests, it’s time to contract with a reliable debt collections agency.

How to make sure you keep the relationship during debt collection

Even in the challenging process of debt collection, it's possible to preserve valuable client relationships. By adopting a strategic and empathetic approach, businesses can recover outstanding payments while minimizing damage to their reputation and future opportunities.

Empathy and professionalism: tips on how to have difficult conversations about money with a client

Approaching conversations about overdue payments with empathy and professionalism is crucial for maintaining positive client relationships. Remember that financial difficulties can be sensitive, and a compassionate approach can yield better results than an aggressive one.

1. Prepare thoroughly: Before any communication, have all relevant information at hand, including invoice details, payment history, and any previous correspondence. This allows for clear, factual discussions.
2. Choose the right channel: While emails are useful for initial reminders, a phone call often allows for more nuanced communication and a better understanding of the client's situation. For highly sensitive cases, an in-person meeting might be appropriate if feasible.
3. Start with understanding: Begin the conversation by acknowledging the client's business and relationship with you. For example, "We value your business and our partnership, and we've noticed an outstanding invoice..."
4. Be clear and direct, yet polite: Clearly state the purpose of the call—to discuss the outstanding payment—without being accusatory. Use polite language and avoid confrontational tones.
5. Listen actively: Allow the client to explain their situation. There might be legitimate reasons for the delay, such as internal processing issues, unforeseen financial hardship, or even a dispute over the invoice. Active listening can help identify the root cause and potential solutions.
6. Focus on solutions, not blame: Shift the conversation from the problem to finding a resolution. Ask, "How can we work together to resolve this?" or "What payment schedule would be feasible for you at this time?"
7. Document everything: Keep detailed records of all communications, including dates, times, discussion points, and agreed-upon actions. This protects both parties and provides a clear audit trail.
   
   

Offering payment plans: when and how to offer a payment plan to a struggling client

Offering a structured payment plan can be an effective way to recover debt while demonstrating flexibility and support to a struggling client. This approach can turn a potential bad debt into a recoverable one and strengthen the client relationship in the long run.

1. Assess the client's situation: Before offering a payment plan, try to understand the client's financial constraints. This might involve a brief, empathetic discussion about their current challenges.
   
   
2. Offer proactive solutions: Instead of waiting for the client to propose a plan, suggest options. For example, "To help you manage this, we could split the outstanding amount into X monthly installments of Y."
   
   
3. Structure the plan clearly:
   1. Payment amount: Determine a realistic amount the client can afford regularly.
   2. Frequency: Set clear payment dates (e.g., weekly, bi-weekly, monthly).
   3. Duration: Define the total number of payments and the end date of the plan.
   4. Interest/fees: Clearly state if any interest or administrative fees will be applied to the payment plan.
4. Get it in writing: Formalize the payment plan with a written agreement signed by both parties. This document should outline all terms and conditions, including consequences of default.
   
   
5. Monitor progress: Regularly track payments made under the plan and follow up promptly if a payment is missed. Consistency in monitoring reinforces the agreement.
   
   

Knowing when to walk away: recognizing when a client relationship is no longer viable

While maintaining client relationships is important, there are times when a relationship becomes unsustainable due to persistent non-payment or a breakdown in trust. Recognizing when to walk away is crucial for a business's financial health and resources.

1. Repeated non-compliance: If a client consistently fails to adhere to agreed-upon payment plans or ignores communication attempts despite your best efforts, it's a strong indicator that the relationship may not be viable.
   
   
2. Unreasonable demands or disputes: If a client repeatedly raises unjustified disputes or makes unreasonable demands that hinder debt recovery, continuing the relationship may not be productive.
   
   
3. High cost of collection: Evaluate the resources (time, money, personnel) being expended on collecting a particular debt. If the cost of collection exceeds the potential recovery, it might be time to consider writing off the debt and moving on.
   
   
4. Damage to reputation or morale: Prolonged, difficult debt collection efforts can negatively impact your team's morale and potentially damage your company's reputation if the client spreads negative feedback, regardless of fault.
   
   
5. Legal advice: If a client relationship becomes particularly contentious or involves significant outstanding amounts, seeking legal advice on the best course of action, including potential litigation or writing off the debt, is advisable.
   
   
6. Future business potential: Objectively assess the likelihood of future profitable business with the client. If the current difficulties suggest that future engagements will be similarly problematic, discontinuing the relationship might be the best strategic choice.

Deciding to end a client relationship should be a last resort, made after all reasonable collection and negotiation efforts have been exhausted. It's a strategic decision to protect your business's financial well-being and focus resources on more viable opportunities.

How to measure the success of your business collections

Measuring the success of your debt collection efforts is crucial for maintaining healthy cash flow and overall business stability. This section outlines key metrics and practical steps to assess your collection process.

1. Collection effectiveness ratio (CER)

The CER quantifies the efficiency of your debt collection procedures.

How to measure: CER is calculated by dividing the total amount of money collected over a specific period by the total amount of outstanding debt during that same period.

Formula: (Amount collected / Total outstanding debt) * 100

Steps to take to measure success:

1. Define a specific time frame (e.g., a month, quarter).
2. Identify all outstanding debts at the beginning of that period.
3. Track all payments received during that period.
4. Apply the CER formula.

What does success look like? A higher CER indicates a more successful collection process. This means your efforts are effectively recovering a larger portion of your outstanding debts.

Benchmark: While benchmarks vary by industry, a CER of 80% or higher is generally considered excellent for consumer debt. For business-to-business (B2B) debt, aiming for 90% or more can be a strong indicator of success.

2. Average collection period (ACP)

The ACP measures the average time it takes to collect outstanding invoices.

How to measure: ACP is calculated by dividing the total number of days outstanding receivables by the average daily sales.

Steps to take to measure success:

• Determine your total accounts receivable at the end of a given period.
• Calculate your average daily sales for the same period.
• Apply the ACP formula.
  
  

What does success look like? A lower ACP indicates a more efficient collection process. This means your business is converting outstanding invoices into cash more quickly.

Benchmark: A good ACP depends on your industry and payment terms. If your payment terms are 30 days, an ACP consistently below 45 days is a good sign. For industries with typical 60-day terms, an ACP of around 75 days might be acceptable.

3. Days sales outstanding (DSO)

DSO measures the average number of days it takes for customers to pay their invoices.

How to measure: DSO is calculated by dividing the total accounts receivable by the average daily sales.

Formula: (Accounts receivable / Total credit sales) * Number of days in the period

Steps to take to measure success:

• Identify your total accounts receivable at the end of the period.
• Determine your total credit sales for the same period.
• Apply the DSO formula.
  
  

What does success look like? A lower DSO indicates a more efficient collection process. This means customers are paying their invoices more promptly, improving your cash flow

Benchmark: Similar to ACP, an ideal DSO aligns with your credit terms. If you offer 30-day payment terms, a DSO of 30-40 days is considered healthy. A DSO significantly higher than your payment terms suggests collection issues.

4. Percentage of bad debt

The percentage of bad debt measures the amount of money owed to your business that is unlikely to be collected.

How to measure: This is calculated by dividing the total amount of bad debt by the total amount of accounts receivable.

Formula: (Total bad debt/Total accounts recievable * 100)

Steps to take to measure success:

• Regularly review your accounts receivable to identify uncollectible debts.
• Sum up the total amount of bad debt for a given period.
• Identify the total accounts receivable for the same period.
• Apply the percentage of bad debt formula.
  
  

What does success look like? A lower percentage of bad debt indicates a more successful collection process. This means your efforts are effective in preventing accounts from becoming uncollectible.

Benchmark: A bad debt percentage of 1% to 3% of total accounts receivable is often considered acceptable for many industries. A percentage higher than 5% warrants immediate attention and a review of collection strategies.

5. Collection cost ratio (CCR)

CCR measures the cost of your collection efforts relative to the amount collected.

How to measure: CCR is calculated by dividing the total cost of collection by the total amount of money collected.

Formula: (Total cost of collection / Total money collected) * 100

Steps to take to measure success:

• Track all costs associated with collections (e.g., staff salaries, software, postage, legal fees).
• Identify the total amount of money collected during the same period.
• Apply the CCR formula.
  
  

What does success look like? A lower CCR indicates a more efficient collection process. This means you are collecting debt without incurring excessive costs.

Benchmark: An ideal CCR is generally below 10%. A CCR between 5% and 10% indicates good efficiency. A CCR above 10% might suggest that your collection process is too expensive relative to the returns.

6. Customer satisfaction

Customer satisfaction is an important metric to consider when evaluating the success of your collections process, as aggressive collection efforts can damage relationships.

How to measure:

• Surveys: Implement short surveys after a collection interaction to gauge customer sentiment (e.g., "How satisfied were you with the professionalism of our collection agent?").
• Net promoter score (NPS): Ask customers how likely they are to recommend your company based on their overall experience, including collections.
• Complaint tracking: Monitor the number and nature of complaints related to collection activities.
• Feedback channels: Provide clear channels for customers to offer feedback or express concerns.
  
  

Steps to take to measure success:

• Regularly collect customer feedback through various channels.
• Analyze feedback for common themes related to collection interactions.
• Track the number of customer complaints or disputes related to collections.
  
  

What does success look like? High customer satisfaction in collections means that even while seeking payment, your interactions are perceived as respectful, professional, and helpful. Low complaint rates and positive survey responses indicate success.

Benchmark: Aim for an average customer satisfaction score of 4 out of 5 on a typical rating scale. For NPS, a score above 30 is generally considered good, and anything above 50 is excellent. A decreasing trend in collection-related complaints is a positive indicator.

5 best practices for efficient business collections

Effective business collections play a crucial role in maintaining cash flow, optimizing financial stability, and fostering positive customer relationships. 

By implementing proven best practices, businesses can enhance their collection processes, minimize outstanding receivables, and secure prompt payments from customers. Here are the top five best practices for efficient business collections:

1. Clear payment terms and conditions

• Explicitly state payment due dates: Avoid ambiguity by clearly specifying when payment is expected (e.g., "Net 30" means payment is due within 30 days of the invoice date).
• Outline accepted payment methods: Indicate which payment methods you accept (e.g., credit card, check, ACH transfer) and provide relevant details like bank account information for wire transfers.
• Detail late payment penalties and interest charges: Discourage late payments by clearly outlining the consequences, such as late fees or interest accrual on overdue balances.
• Include dispute resolution procedures: Explain how customers can raise payment disputes and the steps involved in resolving them.
  
  

Specific techniques for payment plan discussions

When discussing payment plans with clients, foster collaboration and clarity:

• Active listening: Understand their financial situation to tailor realistic plans.
• Empathy: Use non-judgmental language; "I understand financial challenges, we're here to help."
• Collaborative problem-solving: Involve them in finding solutions; ask, "What payment schedule works?" or "How much can you pay?"
• Outline options: Present various payment structures (e.g., long-term small payments, lump sum then installments).
• Highlight benefits: Emphasize how the plan helps them (e.g., avoids fees, prevents collections, maintains credit).
• Set clear compliance expectations: Factually state consequences of non-adherence.
• Confirm understanding/commitment: Ensure they reiterate and commit to the plan.
  
  

2. Prompt and accurate invoicing

• Timely invoice issuance: Send invoices as soon as possible after providing goods or services to ensure prompt payment.
• Accurate invoice details: Double-check all invoice information, including customer details, item descriptions, quantities, prices, and total amounts due, to avoid payment delays due to errors.
• Clear and organized invoice layout: Use a professional and easy-to-understand invoice format that clearly displays all relevant information.
• Multiple invoice delivery options: Consider offering various invoice delivery methods, such as email, postal mail, or online portals, to accommodate customer preferences.
  
  

3. Proactive communication

• Payment reminders: Send friendly reminders before the payment due date to prompt customers to pay on time.
• Follow-up on overdue invoices: Contact customers with overdue invoices promptly via phone, email, or letter to inquire about the payment status and address any issues.
• Maintain a professional and courteous tone: Even when dealing with overdue payments, maintain a professional and respectful demeanor to preserve customer relationships.
• Document all communication: Keep a record of all communication with customers regarding payments to track progress and resolve disputes.
  
  

4. Flexible payment options and incentives

• Multiple payment methods: Offer a variety of payment methods to cater to customer preferences and make it easier for them to pay.
• Payment plans: Consider offering payment plans for large invoices to make them more manageable for customers.
• Early payment discounts: Incentivize early payment by offering discounts to customers who pay before the due date.
• Autopay options: Allow customers to set up automatic payments to streamline the process and reduce the risk of late payments.
  
  

5. Professional debt collection

• Internal collection efforts: Start with internal collection efforts, such as sending reminder letters and making phone calls, before escalating to external agencies.
• Debt collection agency: If internal efforts are unsuccessful, consider hiring a reputable debt collection agency to recover outstanding debts.
• Legal action: As a last resort, you may need to pursue legal action to recover unpaid debts. Consult with an attorney to understand your options and the potential costs involved.

When to automate your debt collection and what features you need to do that

Navigating the complexities of debt collection can be a significant drain on resources for any business. As your operations grow, manual collection processes often become inefficient, time-consuming, and prone to human error, ultimately impacting your cash flow and profitability. 

This section will explore the opportune moments for businesses to transition to automated debt collection systems, along with the essential features these systems must possess to truly optimize your financial recovery efforts.

Collection volume or thresholds for automation consideration

Automating debt collection becomes particularly beneficial as your business scales and the volume of outstanding invoices increases. Consider automation when:

• High volume of invoices: If you consistently issue a large number of invoices (e.g., hundreds or thousands per month), manual follow-ups become unsustainable and prone to errors.
• Growing accounts receivable: A steady increase in your accounts receivable balance, especially in overdue categories, signals a need for more efficient processes.
• Increasing late payment rates: If the percentage of invoices becoming overdue is rising, automation can help proactive intervention.
• Resource constraints: When your credit control team is stretched thin or spending excessive time on repetitive manual tasks, it's time to leverage technology.
• Desire for consistency: To ensure every late payment receives a consistent and timely follow-up, regardless of staff availability.
  
  

Cost-benefit analysis framework for automating debt collection

Before investing in automation, conduct a thorough cost-benefit analysis. This involves comparing the upfront and ongoing costs of automation with the potential savings and improvements.

Costs:

• Software licensing/subscription fees: Evaluate monthly or annual costs.
• Implementation and setup costs: This might include data migration, integration with existing systems (e.g., accounting software), and initial configuration.
• Training expenses: Costs associated with training staff to use the new system.
• Maintenance and support: Ongoing fees for technical support and software updates.
  
  

Benefits:

• Reduced operational costs:
  • Labor savings: Less time spent by staff on manual reminders, follow-ups, and reconciliation.
  • Reduced postage/printing costs: Automation shifts communication to digital channels.
• Improved cash flow: Faster collection of outstanding debts due to timely and consistent reminders.
• Lower bad debt write-offs: Proactive collection efforts reduce the likelihood of debts becoming uncollectible.
• Enhanced customer relationships: Professional and consistent communication, avoiding aggressive manual tactics.
• Increased staff efficiency: Freeing up staff to focus on more complex cases, strategic initiatives, and customer relationship management.
• Better data and insights: Automated systems provide valuable data for performance analysis and process optimization.
• Reduced legal and compliance risks: Automated adherence to regulatory requirements and proper documentation.
  
  

To perform the analysis:

1. Quantify current costs: Calculate the current time and resources spent on manual debt collection.
2. Estimate automation costs: Obtain quotes for software, implementation, and ongoing support.
3. Project potential savings/benefits: Estimate how much cash flow will improve, bad debt will decrease, and staff time will be saved.
4. Calculate ROI: Determine the return on investment by comparing the projected benefits against the total costs.
   
   

Staff resource allocation and efficiency improvements

Automation significantly impacts staff resource allocation, shifting their focus from repetitive tasks to more strategic activities.

• Repetitive task offloading: Automation handles initial reminders, follow-up sequences, and basic payment acknowledgments.
• Focus on high-value tasks: Staff can prioritize complex cases, resolve disputes, negotiate payment plans for truly struggling clients, and build stronger customer relationships.
• Proactive problem-solving: Instead of reacting to overdue invoices, staff can analyze trends and proactively address potential payment issues.
• Reduced administrative burden: Automation minimizes data entry, manual tracking, and report generation, freeing up significant administrative time.
• Improved job satisfaction: By removing tedious tasks, staff can engage in more meaningful work, potentially leading to higher morale and reduced turnover.
• Scalability: The existing team can manage a larger volume of collections without needing to hire additional staff as the business grows.
  
  

What your automation software must have

When choosing debt collection automation software, look for key features that streamline the process and maximize efficiency:Automated Reminder Scheduling and Multi-Channel Communication

• Customizable reminder sequences: Ability to set up pre-defined series of reminders based on payment terms and delinquency stages (e.g., pre-due date, 1 day past due, 7 days past due).
• Multi-channel delivery: Support for sending reminders via email, SMS, and potentially integrated physical mail services for formal notices.
• Personalization: Ability to dynamically insert customer and invoice details into communications (e.g., customer name, invoice number, due date, outstanding amount).
• Automated escalation: Configure rules to automatically escalate communication frequency or tone based on payment status.
• Reply handling and stop-flow: Intelligent recognition of customer replies (e.g., "paid," "dispute") to automatically pause or alter the reminder sequence.
  
  

Payment processing integration and plan management

• Direct payment links: Include secure links in automated reminders for customers to make payments directly, integrating with your existing payment gateway (e.g., Stripe, PayPal, Bacs Direct Debit).
• Automated payment reconciliation: Automatically mark invoices as paid when payments are received through integrated channels.
• Payment plan creation and tracking: Tools to set up and manage installment plans, with automated reminders for each scheduled payment.
• Partial payment handling: Ability to accurately track partial payments and adjust outstanding balances accordingly.
  
  

Compliance monitoring and documentation automation

• UK regulatory compliance: Built-in features to help adhere to UK debt collection regulations (e.g., Late Payment of Commercial Debts (Interest) Act 1998, Consumer Credit Act 1974 for consumer debt if applicable).
• Audit trails: Automatic logging of all communication, actions taken, and payment activities for compliance and dispute resolution.
• Automated documentation: Generation of standardized letters, notices, and reports as per pre-defined templates.
• Data security: Robust security measures to protect sensitive financial and customer data.
  
  

Reporting and analytics for process optimization

• Key performance indicator (KPI) dashboards: Real-time visibility into metrics such as:
  • Collection Effectiveness Ratio (CER)
  • Average Collection Period (ACP)
  • Days Sales Outstanding (DSO)
  • Percentage of Bad Debt
  • Collection Cost Ratio (CCR)
    
    
• Aging reports: Automated categorization of outstanding invoices by age (e.g., 30, 60, 90+ days overdue) for targeted action.
• Forecasting tools: Insights into future cash flow based on payment trends and outstanding receivables.
• Customizable reports: Ability to generate specific reports for internal analysis, financial audits, or stakeholder presentations.
• Trend analysis: Identify patterns in payment behavior, common reasons for late payments, and the effectiveness of different collection strategies over time.
• Agent performance tracking (if applicable): For larger teams, monitor individual or team performance in managing complex cases and recoveries.

Legal considerations you need to keep in mind during debt collection

Understanding the legal landscape is paramount to successful and compliant debt collection. Adhering to relevant legislation protects your business from legal challenges, fines, and reputational damage.

Late Payment of Commercial Debts (Interest) Act 1998 

This Act empowers businesses to charge interest on overdue commercial debts and claim compensation for the costs of recovering those debts.

• Right to statutory interest: Businesses can charge statutory interest on overdue invoices from another business. This interest is 8% over the Bank of England base rate.
• Compensation for recovery costs: The Act also allows businesses to claim a fixed sum as compensation for the administrative costs of recovering a late payment, the amount of which depends on the size of the debt.
• No need for a contract clause: Even if your contract doesn't explicitly state the right to charge interest, the Act provides this right by law. However, including a clause in your terms and conditions reinforces this and makes it clear to clients.
  
  

Financial Conduct Authority guidelines interpretation

While the Financial Conduct Authority (FCA) primarily regulates consumer credit, its principles of fair treatment, transparency, and clear communication are good practice for all debt collection activities, including B2B.

• Fair treatment of customers: Treat all debtors fairly, even in commercial debt. Avoid aggressive, misleading, or oppressive tactics.
• Transparency: Be clear and transparent about the debt amount, how it's calculated, and the consequences of non-payment.
• Clear communication: Ensure all communications are easy to understand and avoid jargon.
• Vulnerability: While typically applied to consumers, it's prudent to consider if a business debtor might be experiencing particular vulnerabilities that impact their ability to pay, and adjust your approach accordingly.
  
  

GDPR compliance during debt collection

The General Data Protection Regulation (GDPR) applies to how businesses handle personal data, which includes data related to individuals within debtor companies (e.g., contact names, financial details).

• Lawful basis for processing: You must have a lawful basis for processing personal data, such as legitimate interest (collecting a debt owed to you) or contractual necessity.
• Data minimization: Only collect and store personal data that is necessary for the purpose of debt collection.
• Transparency: Inform individuals how their data is being used for debt collection. This is often covered in your privacy policy.
• Data security: Implement robust security measures to protect personal data from unauthorised access, loss, or disclosure.
• Individual rights: Be prepared to respond to requests from individuals regarding their data, such as access requests or requests for erasure (though the right to erasure may be limited if you have a legal obligation to retain the data for debt collection).
  
  

Required documentation and record-keeping

Maintaining meticulous records is vital for successful debt collection and for defending against potential disputes or legal challenges.

• Contracts and agreements: Copies of all signed contracts, service agreements, or purchase orders.
• Invoices: All invoices issued, clearly showing dates, amounts, services/goods provided, and payment terms.
• Payment records: Documentation of all payments received, including dates and amounts.
• Communication log: Detailed records of all communication with the debtor, including:
  • Dates and times of calls, emails, and letters.
  • Summaries of discussions and agreements.
  • Copies of all correspondence sent and received.
  • Notes on any disputes raised or promises made.
• Proof of delivery/service: Documentation confirming the delivery of goods or completion of services.
• Legal notices: Copies of any formal demand letters or statutory notices.
  
  

Legal mistakes that invalidate collection efforts

Avoiding common legal pitfalls is crucial to prevent collection efforts from being undermined or leading to legal repercussions for your business.

• Harassment or intimidation: Aggressive, abusive, or excessively frequent communication can be considered harassment.
• Misleading information: Providing false information about the debt, your identity, or legal consequences.
• Breaching privacy: Disclosing debt information to unauthorised third parties.
• Ignoring disputes: Failing to properly investigate and respond to legitimate disputes raised by the debtor.
• Statute of limitations: Attempting to collect debts that are "statute-barred" (meaning the legal time limit for enforcement has passed). In England and Wales, this is generally six years for contractual debts.
• Lack of proper documentation: Inability to provide proof of debt or the collection process if challenged.
  
  

Consumer Credit Act considerations for mixed B2B/B2C businesses

If your business collects both business-to-business (B2B) and business-to-consumer (B2C) debts, you must be aware of the more stringent regulations governing consumer debt. The Consumer Credit Act 1974 (CCA) and related regulations impose significant requirements on consumer credit activities.

• Licensing: Businesses collecting consumer credit debts often require an FCA licence.
• Formal notices: Specific formal notices (e.g., default notices, termination notices) are required before certain enforcement actions can be taken against consumers.
• Pre-action protocol: For consumer debt, there is a specific pre-action protocol for debt claims that must be followed before issuing court proceedings.
• Irresponsible lending: Considerations around whether the credit was granted responsibly.
• Enhanced consumer rights: Consumers have stronger rights regarding challenging debts, obtaining information, and protection from unfair practices.

For businesses dealing with both types of debt, it's essential to have distinct processes and ensure strict compliance with the higher regulatory standards for consumer debt, as non-compliance can lead to severe penalties.

Using Chaser as part of your business collection process

Chaser helps businesses get paid faster, protect their cash flow, and maintain good customer relationships. It helps solve the problem of businesses spending too much time manually monitoring debtors and chasing late payments. 

Thousands of businesses worldwide trust Chaser to automatically chase and collect late payments, track debtors, and improve working capital.

Chaser provides functionalities across the crucial stages of accounts receivable management, which directly contribute to effective debt collection:

Check

Struggling to know which customers are credit-worthy? Chaser credit checking tools help you assess risk upfront with features like Late Payment Predictor and Payer Rating, so you can set appropriate credit limits before problems arise.

Track

The software enables you to monitor and track your receivables, debtors, and chases. It provides visibility into invoice history and customer history.

Chase

Chaser automates the process of chasing outstanding invoices, which is a core part of debt collection.

Automated communication methods

It offers various channels, including email payment reminders, SMS payment reminders, auto-call, in-app phone calls, and letters.

Customization and control

You can utilize 40 polite, proven templates and generally customizable templates. The system allows for complete control over the chasing process, including the ability to toggle chasing at customer and invoice levels.

Smart reminders

Chaser can send instant reminders and even automatically send "thank you" notes after a payment is received.

Professional services and support

Beyond software, Chaser offers a range of flexible accounts receivable services and credit control support tailored to unique business needs. These include debt collection services and access to dedicated credit control specialists.

Wrapping it all up

Effective debt collection is not just about recovering outstanding payments; it's about safeguarding your business's financial health and nurturing valuable customer relationships. 

By strategically approaching debt collection with empathy, professionalism, and the right tools, you can ensure a consistent cash flow, minimize bad debt, and maintain a strong reputation.

Ready to transform your debt collection process and see the benefits firsthand? Try Chaser for 10 days and experience how intelligent automation can streamline your credit control, get you paid faster, and free up your valuable time.

FAQs