Debt recovery explained – a guide for your small business

Commercial debt recovery: how can I help myself and what do I need from a third-party collections business?

Debt recovery explained

Businesses go bust not only because they lose clients or an important contract, but more often than not because they run out of cash, money which if collected could have led to a very different outcome indeed. But before you consider appointing a third-party to help you collect what’s owed, first look at your own internal systems and procedures to avoid a crisis in the first place. Ask yourself what you know about your customer: Are they a good credit risk? Do they have an established reputation? “Knowing Your Customer” is the first, and arguably the most, important step in how to get paid.

Assuming my customer is a good credit risk, then how can I prevent a debt from going bad?

There are some really basic things to consider, and which may avoid having to escalate the problem to a third-party:

  • Have you invoiced the correct amount, to the right legal entity and at the right address?
  • Have you included a Purchase Order (PO) where one is asked for?
  • Indeed, have you spoken to your customer at the beginning and asked them whether there is a particular process you should follow?

It’s amazing how many invoices go unpaid simply because they never end up in the hands of those people authorised to pay them.

This is especially important today.

Remember your contacts are likely to be working from home, or they may even have been furloughed, so your invoices might now have to be sent to a different person or email address.

So let’s imagine you’ve followed best practice, your invoice is correct and not in dispute – or at least not to your knowledge. Did you call them to make sure everything was in order with the goods you supplied and the invoice you subsequently sent? In speaking to them, did you ask for a payment date, or even offer them a discount for paying early?

These simple tips can make all the difference in getting paid, or at the very least, identifying a problem early to give you time to consider the alternatives. It’s also the sort of information that a third-party debt recovery collection agency will want to know, so the better your paperwork, the greater your chances of successful collection.

‘Many smaller suppliers are understandably reluctant to take any action that might jeopardise a future relationship’

I’ve done everything you suggested but my customer still won’t pay. What can I do?

At this point you may decide to appoint a third-party debt collection agency to collect what’s owed. Many smaller suppliers are understandably reluctant to take any action that might jeopardise a future relationship – especially during such unprecedented times – but engaging with a professional debt collection agency will help protect that relationship and should be considered good credit management practice.

What can they do that I can’t do for myself?

That’s a good question. The agency will pursue many of the avenues you may well have tried yourself. Sometimes just the very appointment of a third-party can be enough to get your customer to engage and pay, and sometimes, also, it simply needs a third party to act as an arbiter when a relationship is at risk of breaking down. Remember, commercial debt collection agencies are specialists at what they do.

How do I choose a debt collection agency?

Recommendation is always important, so before instructing a debt collection agency speak to other SMEs/firms who use or have used their services and gauge whether they are right for you.

Most debt collection agencies will have testimonials or details of their clients available on their website.

Transparency is similarly important, especially in relation to any fees you may be charged and how they are applied, when they are applied, and whether the fees change as the case progresses.

Choose a debt collection agency that also understands your industry, where possible. Make sure their reporting procedures are adapted to your needs, and information supplied when you want it as opposed to when they want you to have it.

In terms of trade membership, always choose an agency that is a member of the Credit Services Association (CSA). Debt collection agencies that are members of the CSA act on behalf of nearly all of the major financial institutions, banks, credit card companies, utility providers, businesses and the Government. Its members manage hundreds of thousands of commercial accounts, mostly on behalf of small businesses, recovering hundreds of millions of pounds every year – money that is in turn critical to help the small business sector prosper and grow. If you are using a member of the CSA, you will know that they are not only following the CSA’s strict Code of Practice but also following responsible guidance on how to collect debt during this difficult time. You can be assured that your customer will be treated fairly and shown the appropriate forbearance.

>See also: How to chase debts and get paid

Should they also be authorised by the Financial Conduct Authority (FCA)?

It is a common misconception that all debt collection agencies require FCA authorisation to collect any type of debt recovery. They don’t and not being authorised shouldn’t be viewed as an automatic “red flag”. In fact, they will only be able to obtain FCA authorisation if they are pursuing debts due under credit or hire agreements or regulated peer-to-peer lending. The FCA will only grant authorisation to firms that are actually undertaking activities that it regulates. So, an agency that deals exclusively with, say, utility debts will likely not have an authorisation from the FCA.

It’s worth also noting that some types of firm, such as legal firms, which conduct collection activities will often be regulated not by the FCA, but rather by the Solicitors Regulation Authority.

So, while many agencies will indeed have FCA authorisation for some or all of their activities, if they do not, don’t view that as a negative. Look to see if they are regulated in another way or subject to a relevant industry Code like the CSA’s which applies the same stringent requirements for both regulated and unregulated debts. If in doubt, ask them to set out what professional or regulatory standards they are bound by and look into the answer just as you would check to confirm a claim of membership of an industry body.

What is the process a debt collection agency will go through to recover my money?

Before commencing any work, the agency will go through your own paperwork with you – the terms and conditions you’ve agreed with your customer, any contract in place, and any supporting paperwork to build your case. Armed with this information, the agency will typically start the collections process via letter and telephone, stating that the debt recovery has been assigned to them for collection. The total amount outstanding will be agreed and include any statutory late interest to which you are entitled.

They will quickly uncover, for example, whether a customer is not paying because they have had to furlough their staff, and are awaiting receipt of a government loan, in which case the issue is one of timing.

Alternatively, they will assess if there are no valid reasons for why a debt hasn’t been settled and negotiate an appropriate arrangement (e.g. an initial upfront payment and subsequent instalments) to their client’s satisfaction if this is possible.

If it is not possible to come to an arrangement to repay the debt or a customer is failing to engage, you might wish to escalate matters to the courts. This is normally as a last resort and may depend on a variety of factors, but these can be discussed with you. It may also depend on the timeframe for judgment and enforcement, especially in the current climate, with significant delays being reported in the legal process. If a case does go to court, and judgment is made in your favour, a court enforcement officer will be appointed to recover your money or assets to the value of what you are owed. The vast majority of cases are resolved without court action being necessary.

Do all debt collection agencies operate the same model?

No, there are a range of models and charging structures. Many operate on a “commission” basis (assuming no legal action is required). If they are successful, then they are paid a commission on the money they recover. The amount will vary based on the age of the debt, the size of the balance outstanding, and the country from which the money is being collected (remembering that you may be working with overseas customers). Some agencies offer a “letter only – credit control intervention” service (i.e. a letter before action, email, or text service) and some a “no collect-no fee” model.  The debt collection agency will be able to offer you the most appropriate model/rate for your debt type and the service you’re looking for. Often, as said previously, the intervention of a third party is sufficient for a customer to settle what is outstanding.

When should I engage a debt collection agency?

 The general advice for when an invoice is overdue – and you have been unable to get the customer to engage reasonably with you about addressing that – is that it should not wait. Whilst new revenue might be harder to find right now it is important to make sure that the hard work you’ve already put into your business is paid for.

Will my debt collection agency be mindful of my customer’s situation?

Yes. Debt collection agents are trained to be empathetic and flexible, taking into consideration the customer’s circumstances so that they can easily adapt to give them the appropriate periods of breathing space or negotiate more time to pay or a settlement, and can also signpost them to any sources of advice that might be available to them.

Chris Leslie is chief executive of the Credit Services Association

Further reading on debt recovery

How to choose a debt collection agency

Chris Leslie

Chris Leslie

Chris Leslie is chief executive of the Credit Services Association.

Related Topics

Bad debt
Managing Cashflow

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