In this week’s blog we’re taking a deep dive into debt collection.
We'll look at when you (the business owner) might call in the services of a debt collection agency and the potential disadvantages of doing so. As we're in 2021, we'll also explore some alternatives that may prove more effective than banging on somebody's door.
What is debt collection?
Before we get to the meat of the sandwich, let’s start at the beginning with a definition of the term:
Debt collection is the process of pursuing payments of debts owed by individuals or businesses. An organisation that specialises in debt collection is known as a collection agency or debt collector.
You know the pain...
As a business owner it’s hard to top the frustration of providing goods or services for a customer only to be met by radio silence or excuses when it comes time to collect payment.
This situation is not uncommon and has become a huge problem for UK businesses. Recent research from the accountancy software platform Xero shows that “over half of the invoices issued by Xero’s small business subscribers are paid late.”
This very real pain point coupled with low barriers to entry has led to a burgeoning debt collection industry.
Indeed, if you find that your cash flow is being significantly impacted by overdue invoices, you might consider calling in a bomber jacket wearing superhero to collect your outstanding debts.
How does debt collection work?
A debt collection agency will collect in your debt for a fee. This is typically a percentage of the total debt and usually ranges from between 10% and 30% (depending on the size of the debt).
If things have deteriorated to the point where you feel you have no alternative, sacrificing a hefty chunk of the invoice for the guarantee of some return might seem like a good idea.
However, there are drawbacks…
Disadvantages of traditional debt collection
In most instances traditional debt collection is the nuclear option.
If you’ve reached the point where you’re calling a debt collector, chances are you and the customer will not be working together again.
Depending on the agency you use and their approach, calling in debt collectors may also have a negative impact on the reputation of your business.
As we’ve already touched on earlier in the article, the main disadvantage of using a debt collection agency is the size of the fees they charge. These typically range from somewhere between 10% and 30% (depending on the size of the debt).
What are the alternatives to debt collection?
With all that in mind, the dream of a debt collecting hero fighting the good fight might start to look more like a nightmare.
So if you don’t want to write off the debt and calling in the debt collectors seems a bit extreme, what else can you do?
One alternative to debt collection is mediation. Mediation is a structured and interactive process where an impartial third party assists disputing parties in resolving conflict through the use of negotiation techniques.
While this can seem like an amicable solution, if the customer hasn’t communicated much to the point that you’re considering this option, they may well refuse an invitation to a mediation session.
Communicate with the top
If you’re not already communicating with the most senior individual within the organisation, it might be a good idea to send a letter or email directly to the Managing Director or Owner of the business to see if that resolves the matter.
Finally, you can try itsettled. Although if you care about customer relationships, you should try this first.
Designed specifically to recover payment from good payers, bad payers and non-payers, the legally compliant process has collected over £420 million for UK businesses.
As well as collecting the money you’re owed and improving cash flow, the consistent, reasonable and firm (when it needs to be) communication is specifically designed to help you maintain relationships with your customers.
The intuitive platform does all the thinking for you, meaning you don’t have to be a credit control expert to use it. You can have your account set up in less than 60 seconds and complete your credit management tasks in less than 15 minutes a day.
Interested? Head to https://www.itsettled.co.uk/unpaid-invoices where you can chase your first invoice for free.