Debt collection letters to improve SME cash flow

The Better Payment Protection Campaign (BPPC), a joint public-private initiative, has provided a series of example letters to help small firms in their efforts to collect debts and get to grips with credit management.

Businesses with 50 employees or less are now allowed – under the second stage of the Late Payment of Commercial Debts (Interest) Act 1998 – to charge interest if another small business pays its bills late. The BPPC’s year-long, national “Collect the Cash” campaign – of which these letters form a part – aims to educate and encourage small businesses to make trade debt collection and credit management their top priority.

Late payments can cause serious cash flow problems, and eat into a business’s profits. The firm may have to put up its prices, if it can, to make up the required finance – which may cause it to lose its competitive edge – or go out of business. A ripple effect leads to a general bad payment culture.

Talking to SME owners during a series of seminars on credit management in February, Helen Walkinshaw, spokesperson for the BPPC commented, ‘Small businesses just don’t know what to put in their letters so their debtors will know that they’ll charge interest. Some of the letters look like they are politely asking after their health! They have got to make sure that it’s very clear what they are saying.”

The example debt collection letters form part of a strategy, explained Walkinshaw, to provide “a clear oversight of how a credit management system should work. Some of the companies send up to 20 letters to chase one debt. The business should send one or maybe two letters, and make sure that the final reminder is the final reminder. Otherwise the company will lose all integrity.”

The series of seven letters, available free on the BPPC’s website, demonstrate the collection process from issuing the initial invoice through to issuing the final demand. They have been compiled by a credit management professional and cover the following subjects:

  • Letter informing a debtor that statutory interest and compensation for debt recovery costs will be charged on an existing debt
  • Letter informing a debtor that statutory interest and compensation for debt recovery costs will be charged on all future orders
  • Letter informing a debtor that contractual interest will be charged
  • General reminder letters (x2)
  • Final reminder letter
  • Letter advising the appointment of a collection agency

See also: Debt recovery explained – a guide for your small businesses

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Bad debt

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