It is common for both businesses and private individuals to be in a situation where someone owes them money.
When facing the prospect of collecting a debt, it can often be difficult to know exactly what should be done. Regardless of the course of action taken, the key objective is to recover the funds promptly in a professional manner.
Both businesses and individuals need a stable cash flow to maintain good financial standing. If this cash flow is jeopardised or put at risk in any way, it can cause stress, frustration, and may even prevent you from paying your bills.
A recent study showed that a shocking 17% of small businesses polled had sent out invoices that were never paid. Many have had to make drastic cutbacks to recoup the costs of what they are owed, and some have had to close down entirely.
Thankfully, there are many solutions to the issue of being owed money, and having an insight into what these are can save both time and money.
Debt Collection Tips
Being owed money is always a stressful situation, and can cause problems if not dealt with properly. Many professional solutions can help, such as a debt collection agency, but knowing what to do before escalating the matter can save both time and money.
Payment Terms – Prevent Bad Debt
It is common for businesses to create ‘payment terms’. This is a document that details the client’s payment obligations once an agreement is completed. It must clearly state what the client must do regarding payments, as well as what could happen if they do not pay.
If the client has agreed to these terms (preferably with a signature), then it can help later if the matter needs to be escalated to a third party.
Most businesses operate on 30-day payment terms, which is normally enough time for a client to pay. It is common for larger companies to operate on 60-day terms.
Although many consider it to be awkward, private individuals should set up payment terms for personal arrangements too. For example, if you are loaning money to a friend, it is wise to set up plans for repayment in advance, and asking them to agree to it by signing a document.
The main goal here is to make sure that the person you are dealing with clearly understands what their payment obligations are and that they agree with them.
If they do not wish to agree to these terms, then it may be a sign that they did not intend to honour the agreement anyway, thus saving you from being out of pocket later.
Contact The Debtor – Issue A Payment Reminder
If you are in a position where someone owes you money, the first step is to contact them to issue a payment reminder letter.
A message like this should be sent through recorded postal delivery, or in an email with a read receipt. This will confirm that the message has been received and read, therefore preventing the debtor from claiming that they never heard from you.
This first letter should be polite and professional and serve to remind the debtor of what they owe as well as when it is due.
It is better to send written correspondence as opposed to using verbal communication, as this way there is a paper trail of what has been said. It is appropriate to send the first letter after the payment is overdue by under 14 days.
Second Contact – Issue A Second Reminder
It is common for the first payment reminder to be missed or ignored. If this is the case, it is appropriate to send a second letter.
Once again, this letter should be sent in a way that can be recorded, and must also be professional in tone. You can also include documents that support your claim, for example, the original invoice, receipts or payment terms.
You should send a second letter if it has been more than 14 days since the payment was overdue.
Send A Final Notice – Letter Before Action
Despite the best efforts of many people, it is often the case that payment reminders are ignored. There will always be people that will go to any length to avoid paying what they owe, and many will simply hope a debt goes away.
If it has been 30 days or more since you were meant to have been paid, you can send a ‘final notice’ letter that explains your intention to escalate the matter and involve a third party.
This is sometimes called a ‘letter before action’, and can finally prompt a debtor to make a payment.
Escalate The Matter – Hire A Third Party
If your reminders have been unsuccessful, it is time to seek professional help. A professional debt collection agency will be able to recover the money that you are owed at a lower cost than alternative methods, such as court action.
When searching for an agency, it is best to find a specialist in your sector. In the UK, Federal Management is known as the leader in business debt collection.
Other agencies specialise in specific working and industry sectors. Frontline Collections specialise in private debt collection, in particular for those that operate small businesses, freelancers or those that are self-employed.
