The Ultimate Guide to Debt Recovery
As every finance professional will know, late payments are a problem for the majority of businesses selling on payment terms. In fact, in the average month, 48% of all invoices are paid late (Xero). Recent research has shown this problem is now even more prevalent, with a 62.9% increase in overdue invoices since the Covid-19 pandemic (Sidetrade, 2020).
In some cases, your organisation may be faced with particularly tricky customers, who require more than internal email reminders to pay their invoices. This situation can be frustrating. But, ensuring you have a sound understanding of debt recovery, what it involves, and when to use it, will mean you’re well-equipped next time you’re faced with these tricky customers.
This guide covers:
What is debt collection
Commercial debt recovery involves the collection of unpaid invoices from a business (debtor) by a third party on behalf of another business (the creditor). Businesses specialising in debt collection are known as collection agencies, debt collectors, or debt recovery services.
Commercial debts are those owed by an organisation. For businesses selling on payment terms, these generally arise after an overdue invoice remains unpaid for a long period of time.
When to use debt collection
Having a set process in place will help your organisation avoid wasting any time deliberating over whether or not to escalate an invoice to a debt recovery agency.
We recommend considering the following, and choosing your business’ ‘stop points’ for using collections:
- How many days overdue will payments be, or how many contact attempts will be made before you decide to escalate?
- What is the lowest invoice value that you’re willing to escalate to the next step. Similarly, what is the highest invoice value that you’re willing to write off as bad debt?
We recommend escalation once a customer’s overdue invoice(s) reach both of the following stop points:
- Invoices reach 30 days overdue
- Total invoice value is £50 or higher
We’ve also outlined some red flags below. If these circumstances occur in your business, take this as a further sign that it’s time to consider escalating to a debt recovery expert:
- You don’t have the internal resources
- Your internal efforts haven’t paid off
- Your customer cannot be reached
- You’re dealing with difficult invoice disputes
Debt collections and customer relationships
A key roadblock for businesses that are considering using a debt collector, is how this could impact customer relationships.
Your business spends time, money and effort building positive and profitable relationships with customers. Escalating overdue invoices to a traditional debt collections agency can put those valuable customer relationships at risk.
Traditional debt collection agencies often use aggressive, heavy-handed techniques to recover overdue funds from customers, such as excessive calling and emailing.To avoid severing valuable customer relationships for good, be mindful of this when selecting a debt collection provider. We recommend opting for a provider that will actively protect your customer relationships and industry reputation.
Digital debt collections
Digital debt collection services are the future of debt recovery. So, it is crucial that you are aware of the benefits that opting for a digital or online debt collection service can have. It involves recovering payments for overdue debts through digital channels such as email, SMS and other online tools. Benefits of digital debt collections include:
- Customer retention: digital collections empower the debtor to self-manage payments and resolve their debts
- Faster payments: debt collection providers that use data and insights, like Chaser Collections, can ensure debtors are always reached out to with the right message, at the best times
- Cost savings: digital debt collection providers face lower internal operational costs, allowing them to pass on cost-savings to their users
Our article ‘Why Digital Debt Collection is the Next Big Thing’ covers the benefits of digital debt collections in more detail, and gives a comprehensive outline of 3 steps you can take to bullet-proof your receivables process.
Debt collection fees
Typically, debt collectors charge between 25% up to 50% of the amount collected (Investopedia, 2020). However, with a subscription to Chaser, invoice collection fees can be as low as 5%. Often, traditional debt collection agencies can be unclear about their pricing upfront. Unfortunately, many debt collection users find themselves faced with unexpected fees once payments have been collected.
The majority of debt collection agencies will promise a ‘no win no fee’ pricing model. However, it is worthwhile checking the fine print on this, and reading their terms and conditions. Some agencies apply this pricing model only to what is deemed as “good” debt, and will expect you to pay for anything they classify as “bad” debt, irrespective of whether it is collected or not. Additionally, some ‘no win no fee’ providers have been criticised for charging an unexpected administration charge or membership fees before they will start their process.
To avoid any unexpected charges, we recommend opting for a true no win no fee business debt recovery service that can give you a clear, transparent pricing breakdown upfront.
Debt collection compliance
Setting up your own internal debt collections system is generally not recommended, as this can be highly expensive and time-consuming for your business. You will need to hire specialists or train existing staff, without guarantee that this will be efficient or cost-effective (Credit Protection Association, 2020).
If you do choose to opt for running your debt recovery processes internally, a crucial consideration is ensuring your processes are compliant with all regulatory requirements. The FCA’s ‘Consumer Credit sourcebook’ (CONC) provides valuable regulatory guidance around arrears, default and recovery.
Since the development of new communications technology that can be used for collections, The Consumer Financial Protection Bureau is developing a series of updated regulations. These regulations expand on and cover gaps left in previous previous legislation. Huge impacts will be seen on the collections industry when this legislation comes into place. So, whether you choose to run collections in-house or externally, debt collection processes should always be agile and able to quickly reconfigure to the changing regulatory requirements. Opting for digital debt collection offers the flexibility to adapt approaches in line with new regulations as they are introduced.
An alternative to recovering debts using a debt collection agency is to take legal action against your customer. Before proceeding to any form of legal action, you must first send your customer a letter of claim complying with the Pre-Action protocol, which, among other elements, must include:
- Summary of the facts
- What you want from the party you're claiming from
- How you've calculated the sum you want to claim
- Copies of key documents that you'll use to support your case
- List of any documents you want from the other party
- Reasonable deadline for a response (usually 28 days)
Legal proceedings should be a last resort for collecting your overdue invoices. Taking your customers through this process can permanently damage that relationship and will make repeat business highly unlikely.
In the case that legal action needs to be taken to get an invoice paid, be weary of providers with unclear pricing, as you don’t want to be hit with hidden and unexpected fees. Ensure your chosen legal provider, or business debt recovery service that offers legal proceedings can give you a clear, transparent pricing breakdown upfront.
Avoiding bad debts
Taking practical steps to avoid bad debts is crucial, as it will drastically reduce your business’ dependency on writing off those bad debts, and using debt collections services.
Avoiding bad debts involves the identification of non-payment risks, and the reduction of non-payment risks from customers.
Identifying non-payment risks can involve:
- Conducting credit checks
- Introducing discovery calls for any new customers
- Searching online credit sites like Dun & Bradstreet
- Checking financial history for any ‘red flags’ on Companies House
- Speaking with your network
Steps to reduce non-payment risks can include:
- Putting credit limits in place
- Reviewing your payment terms
- Requesting upfront payment of the first 2 invoices
- Using late payment fees and interest
Chaser has a wealth of support and resources available on how to optimise your credit control process and avoid bad debts. Including The Essential Guide to Collections for Credit Controllers, covering, amongst other topics, best practise guidance on how to manage your bad payers.
Chaser Collections provides a considerate debt recovery service for small-medium businesses, that gets your overdue invoices paid without damaging customer relationships.
Our small business debt collection service is powered by the Chaser credit control software and is the first service of its kind, combining data driven insights with invoice chasing expertise. Our unique approach prioritises customer relationships and leads to a higher success rate. We act as an invaluable external mediator to resolve a situation that you may have written off as hopeless. And, you have complete peace of mind throughout the whole process as all communication is logged within the Chaser software.
By signing up for Chaser, you’ll automatically have the option to use Chaser Collections - you can escalate invoices to our collections service with just 3 clicks! The no win no fee service is priced separately to Chaser, and all pricing can be viewed upfront within your Chaser account. To understand more about what Chaser Collections is, how it works, and why it’s the perfect solution to your overdue invoice problem, you can download our fact sheet below: