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By The Editors
01 October 2021
How To Reduce and Recover
Debt collection or recovery – is an unfortunate and inevitable reality for most businesses. When customers are ultimately unable to pay for their purchase, the impact of those lost dollars can be significant. For small businesses especially, failure to collect on outstanding accounts receivables can have dire consequences.
Companies may employ a variety of methods to collect on past due invoices, such as phone calls, emails, letters, and site visits. These can be time-consuming and costly. Regardless of the method used, when it comes to business debt collections, efficiency is the name of the game. The sooner companies can receive payment on goods and services rendered, the better it is for their bottom line.
When it comes to staying ahead of bad debt, what strategies should you apply to ensure that outstanding debt is recovered in the most time- and cost-effective way? This article discusses some of the common business debt collections best practices, how they work, and why they might not work for you.
How Debt Collection Works – Usual Process
For most companies, it is the accounts receivable department’s responsibility to manage debt collection. While the debt recovery process may vary from country to country, it typically goes as follows:
1. Before any action is taken, it is best to confirm that the customer was, in fact, issued an invoice.
2. Next, the customer is contacted via automated phone call or email and reminded that their account is past due. They are asked to pay immediately, or risk incurring late payment penalties or interest.
3. If the customer does not respond within 24-72 hours, a staff member may follow up by phone.
4. At the same time, a letter is sent by mail.
This process may be repeated several times, depending on the company’s grace period. The average collection period for accounts receivable is 30 days, and payments are considered severely delinquent when they are more than 90 days past due. When the payment hits the 120-day mark or is deemed uncollectable, the account may be sent to a third-party collection agency (or debt collector). But what debt collection agencies can do to recover a debt that is severely delinquent – may be limited.
How to Prioritise Business Debt Collections with Data
Most companies prioritise collections based on which debtors owe the most, and which ones are the most delinquent. For example, if one customer owes $10,000 and is 6 months past due, they would be prioritised over another customer who owes $5,000 and is 3 months past due. The rationale behind this approach is that the more money you can recover at once, the sooner you can use that working capital. While in theory, this approach sounds reasonable, it does come with a certain level of risk.
One reason why this method is risky is because the longer an account remains delinquent, the less likely the account holder is to pay their debt. Additionally, prioritising collections without factoring in vital customer data, such as business credit scores, trade payment history, and financial statements, can be dangerous. A data-driven, predictive collections prioritisation model informs collections staff which accounts are the most or least likely to pay. This model prevents your company from wasting precious time and resources trying to collect money you may never receive.
Prioritisation vs Risk-based Methods
To illustrate the immediate edge of a traditional prioritisation method versus a risked-based method, imagine your team is focused on recovering the above-mentioned $10,000 debt, while unbeknownst to them, the account holder for the $5,000 debt is at high risk of going out of business. If the team was able to receive alerts notifying them when customers exhibit alarming payment behaviours or when one signals potential risk of bankruptcy or insolvency, they could quickly pivot their collection efforts. In this case, it would be logical to move the $5,000 account to the top of the collections list to better your chance at successful recovery.
Regardless of the types of recovery methods you currently use, a data-driven, risk-based approach will help you better predict write-off levels and insulate your business from defaults.
When to Outsource to a Collections Agency or Company
Debt collection services can be a costly option, and for that reason, they are typically used as a last resort. Debt collection agency rates will vary, ranging between 25% to 40% of the collected amount. Despite this, these agencies provide a necessary service for companies to avoid squandering resources chasing after customers who are obviously not able to or unwilling to pay their debt. This allows your staff to concentrate on core business activities and outsourcing the collections to an agency. It can be a positive sum game (win-win situation) for your business when you outsource the debts that are unlikely to be paid to an agency – after all, any returns on those amounts will be a pleasant surprise.
While agencies may differ in their modus operandi, some can rely on industry-specific leverage to boost collection rates. For instance, Dun & Bradstreet and Singapore Commercial Credit Bureau hinge on bureaucratic capabilities to encourage payment from defaulters to avoid being penalised in our business and consumer records.
Dun & Bradstreet is the preferred collection agency for both consumer and corporate debt collections in Singapore due to its affiliation with bureau partners in the B2B (Singapore Commercial Credit Bureau) and B2C (Credit Bureau Singapore) landscape.