Small businesses and startups can be likened to those sheep that spend their days on the outside of the herd. They are vulnerable and easy prey for the host of calamities that can befall a new or small business.
When you don't have the cash flow to cover errant customer debt, and your ability to feed your family and pay the rent is reliant on the money from just a few accounts, it becomes apparent just how critical SME debt recovery is.
We've spoken at length about the importance of effective credit control practices and all the checks and balances that should be in place. But over and above that, there are dozens of ways that debt recovery for small businesses can be made just a little more manageable and efficient, thereby improving the overall financial health of your business.
Below you will find several strategies for your small business you can put into practice right away to get those outstanding debts rolling in.
The importance of small to medium businesses
Small and medium enterprises (SME) are crucial to our economic system creating employment opportunities, keeping unemployment rates low and stabilising the UK economy.
The challenge of SME debt collection practices
Unfortunately, there is an issue with which especially SMEs tend to experience major difficulties. This issue is the effective collection of bad debts from customers, which is made all the more critical with the current cost of living crisis. After all, if as few as one or two clients fail to settle their accounts on time, the rising costs of basics make it easier than ever to find your small business in financial difficulty.
Happily, these difficulties can be overcome. Below you'll find several factors that can have a positive impact on recovering small to medium business debt, making the whole debt collections process easier and more effective. Keep reading to discover how they can work for your business.
Use debt collection software
Automating functions, especially in the field of accounting, makes it less personal. Nobody likes asking for money to cover bad debts or updating call notes, and it takes a special kind of person to choose a career in debt collection!
The benefits of debt collection software
However, setting up your debt collection practices to include the automatic generation and sending of customer statements for overdue invoices does two things. Firstly, it saves you wasting time on manual processes, where mistakes can easily be made and makes your record keeping more accurate and efficient.
Secondly, because your system is initiating the due date conversation with your customers it can depersonalise the experience for both you and your customers, making it much easier to collect any debt. After all, it's hard to be snarky with a computer-generated communication. This leaves debtors little to do than agree with the facts as they are laid out, including any overdue interest owed, as well as notification of any legal proceedings.
Auto-generated messages that request payment can be set up for all your customers and linked into your small business accounting system guaranteeing accurate, time-sensitive follow-ups on any channel that you choose; email, SMS, or WhatsApp. Thereby reducing the time spent on manual effort, and increasing the likelihood they will resolve any overdue payments.
Granted, this won't solve all the debt collection problems, but it's a great start.
Encourage debt payment self-service
It may seem counterintuitive, but there is data to suggest that a customer-oriented approach to the debt collection process works. Essentially, we put the power of debt payment and platform choice before the customer and place perceived control in their hands.
In an article from Forbes, Four Keys Of A Successful Debt Collection Strategy the key findings amount several themes were that: “Customer-oriented operations focus on making payments easy, efficient and secure for customers (debtors).
“With the rise of smartphones and apps, debt collection agencies should consider accepting or using app-based payment methods alongside web-based methods. Self-service portals such as online payments, payment apps and automated phone calls can allow for secure and easy debt collections. I've found that when a debtor has an easier time making payments, they are usually more willing to work out a payment plan.”
This DIY approach to the debt collection process may well work for your small business, resulting in another cog in the debt collections wheel that you don't have to concern yourself with, as well as improved operational efficiency.
Mind your language when engaged in the debt collection process
Our choice of words and tone can affect the way a person responds to us. (If not, run this by your spouse.) This factor is just as vital when communicating with your debtors.
The Psychology of Debt Collection written by Nobel Prize winner Richard Thale makes some valuable points.
“It's understood that language can have a dramatic positive influence on people's behaviour. The Behavioural Insights Team in Australia found that active wording like “you owe” rather than “amount owed” led to significant improvements in payment rates.
“In the UK, a change in the wording of the letter sent to those who failed to pay their taxes on time increased payments by more than five percentage points. Instead of a threat, “You are currently in the small minority of people who have not paid their taxes on time” worked best.”
Small changes such as those mentioned above, alongside a professional credit control system and a firm yet reasonable tone lay the foundation for great results in debt collection, as well as happier customers.
Be incrementally assertive in the debt recovery process
With debt collection being such a universally distasteful task, it's too easy to enter into a call with a confrontational tone. However, small businesses can't afford to upset good customers. Therefore, it's a smart idea to presume that they forgot to settle an invoice or to offer support in gathering the information they may be missing to make payment.
This mindset will be evident in your tone and is less likely to upset or offend someone who has a genuine reason for late payment, making it one of the most effective strategies in securing a late charge, while also not alienating a good customer.
Thereafter, you have the option to be more assertive in your communication, and include senior management as a form of debt collection escalation, while never crossing the line into rude or unprofessional.
Call in the debt recovery pros
Have you lost all hope that this customer is going to pay? Even at this point, a small to medium business may be hesitant to call in debt collection agencies. However, it's worth doing the maths on how long you spend chasing this client, what the cost of this overdue account is to your business, and if you really want delinquent clients like this anyway.
Will you lose the customer if you hand them over to a debt collection agency? Perhaps. But you may also get your debts back and learn a valuable lesson in vetting potential clients to whom you intend to extend credit. Debt collection agencies can also support your business by creating a repayment plan for your customers, making it easier for them to make payments incrementally.
Don't be too hasty to employ a debt collection agency though. As we've highlighted above, there may be a genuine reason that a previously great client has outstanding late payments on their account so it would be wise to find a healthy balance that works for your small business.
Don't ignore fair debt collection processes
There are stringent laws governing the practices on how businesses are allowed to deal with debt collection and customers, including:
- The Unfair Contract Terms Act
- The Limitation Act 1980
- Late Payment of Commercial Debts Act
- The Consumer Protection Act,
- The Consumer Protection from Unfair Trading Regulations
These laws authorise businesses to pursue payment, but they also have firm boundaries which exclude aggressive debt collection tactics, and unethical behaviour and ensure fair outcomes for debtors. These practices will also help you demonstrate compliance, and avoid poor customer outcomes, and legal action because they ensure fair treatment of the debtor and so help preserve the reputation of your small business.
SME debt recovery made simple
If you've read through this information and you're still concerned about your ability to collect payments effectively, then we can assist in multiple ways. First of all, we provide collections services that allow you to automate your credit control systems, resulting in smoother day-to-day operations, improved debt collection, lowered cost, and increased cash flow for your small to medium business.
Alternatively, if you would like to completely rid yourself of the burden of debt collection for your small business, we also offer a full range of services covering the debt recovery process, enacted by a team of dedicated professionals with years of experience in the field. The benefits of this include expedited debt recovery, and the ability to confidently deal with the unique challenges that debt collection can often bring, no matter how complex or sensitive.
Please feel free to contact our friendly team for a free demo or ask all the questions about our services you need answers to, in order to select the best debt collection services and software for your SME.
