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Collecting What’s Due: Best Practices for Optimum Debt Recovery

In a perfect world, businesses would extend credit and the borrowing company would pay their invoices on time until fully repaid. Unfortunately, the business-to-business (B2B) credit world is not perfect, and businesses sometimes need to instigate collections procedures to recover bad debts. However, collecting on bad debt is a tricky path if you want to maintain a good business relationship. Here are some best practices.

Effective collections practices begin with the credit application

As odd as it sounds, the best debt collection practice is not having to resort to collection at all. This means you should:

  • Have a written credit policy that clearly outlines the criteria for extending credit and ensures consistency in credit decisions.
  • Have customers fill out a business credit application. Ask for trade and bank references along with financial statements.
  • Set clear credit qualifications and credit limits.
  • Get to know each business and what economic and environmental conditions may affect their bottom line and ability to repay a loan.

Stay on top of your creditors

The probability of recovery drops with the length of delinquency. Therefore, you need to monitor your customers’ late payments.

A good practice is to start collection processes for any accounts that are more than 90 days overdue. Another effective strategy is to prioritize accounts according to likelihood of recovery. Spend your time and energy on the accounts where your efforts are most likely to pay off.

Yet another best practice is to establish late fees. These fees are a helpful tool to encourage prompt payment and to compensate you for the costs of late payments.

Communication is key

When an account is 90 days overdue (or whatever is stated in your credit policy), you need to start by sending a demand letter. A demand letter is a formal notice that your customer owes a debt. This letter is also important in starting a paper trail, which is a key element in any collection litigation. The letter needs to include:

  • Names of the business creditor and the debtor
  • Information about the debt and overdue payments
  • A timeline within which the business debtor should make the overdue payments
  • A statement indicating that failure to pay shall be grounds for the creditor to start litigation

Your communication with the customer should always be courteous and professional. Never use abusive or threatening collection tactics. This is one of the worst mistakes a collector can make.

Additional tips

In addition to good communication, you should provide the debtor with options. Sometimes a debtor will have legitimate reasons for not paying — such as having to wait for payments themselves — but will be able to pay in the future. Try to work out a plan to get the full debt paid off, but there are times when you may have to settle for partial repayment.

Bad debt is a fact of life for most commercial enterprises. In fact, if you don’t have bad debt, it likely means your credit policies are too strict and you are limiting your company’s ability to grow. But collecting what is owed is time consuming, frustrating, and often unsuccessful. That’s why it’s usually a good practice to seek the assistance of a professional collection agency with the experience to increase your chances of recovering the money owed to you.

Need help managing your commercial credit risk? MSCCM financial experts can assist you. Contact us today.

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