Important subsections of business finance, credit management and debt collections are similar enough to often be confused, but are actually separate, critical, elements of your accounts receivable process.
In this article, we’ll be outlining the differences between the two, in terms of their processes and outcomes, but also where they cross over and how debt collections can work hand in hand with your usual credit management to recoup money that many businesses simply write off as debts.
What is credit management?
Credit management is a series of interlinked processes and workflows that allow your accounts receivable team to manage your business's cash flow by following up on payments and collecting overdue invoices as soon as possible.
It also includes a series of best practices that allow for the continuous iteration and improvement of this process.
Common improvements include:
- Implementing and updating a credit control policy that outlines your payment terms, how you deal with debtors, and includes guidance on late payment fees and early payment discounts.
- Conducting credit checks on customers during onboarding, and on a regular basis, and using that information to assess a customer’s ongoing creditworthiness.
- Making use of alternative payment options, such as payment plans to assist customers who are facing financial difficulties while still collecting outstanding payments.
- Working to reduce human error in invoices, and address customer questions in order to reduce the number of invoice queries, disputes, and delays.
At its most basic level, credit management can be narrowed down to reducing credit risk, sending invoices, collection of payments, and sending statement of accounts to round out a transaction.
However, effective collections are a more complicated ecosystem of interconnected processes that work to maintain the cash flow a business needs to thrive, while also protecting it from potential bad debt.
What are debt collections?
The debt collection process involves pursuing the payment of debts that are past due. Debt collection is the process of contacting the borrower who owes the debt and negotiating a payment plan or requesting immediate payment in full. Debt collection may involve a variety of tactics, such as sending emails, sending debt collection letters, making phone calls, and using a collection agency. In some cases, debt collection may also involve legal action to recover the debt.
Debt collection is usually a final step in the process of recovering payment, and debt recovery agencies are typically called in when businesses have exhausted all of their internal options for recovering payment.
In short, if an invoice is outstanding and your internal credit management or accounts receivable team is unable to resolve the situation, outsourcing the issue to a debt collection professional gives you a greater chance of recovering those funds with expert help from those specializing in debt collection.
Given that businesses write off £8 in every £100 earned as bad debt, the benefits of effective debt collections are clear.
What is the difference between credit management and debt collection?
While there are some similarities between credit management and debt collections, they do have some significant differences.
Credit management is usually done internally and typically encompasses a wider range of processes and activities than debt collection does. The credit management team performs tasks such as sending invoices and statements of account, reminding customers of unpaid balances, resolving invoice disputes, improving the collections process, and continually assessing customers' creditworthiness.
In short, credit management can be seen as the ‘proactive’ side of the receivables process, which focuses on preventing bad debts, minimising late payments, and reducing credit risk.
In contrast, debt collection involves pursuing payment of debts that are past due. Debt collection may involve contacting the borrower directly, using a collection agency, or taking legal action to recover the debt. Debt collection is the more ‘reactive’ approach to handling accounts receivables, focusing on collecting debts only once they have become past-due or ‘bad debts’.
Where credit management and debt collections overlap
Credit management and debt collection both have a common goal of ensuring that debts are paid in a timely manner and minimizing financial loss for the business extending credit. Both processes also involve tracking and monitoring of invoices and regular communication with customers to resolve any payment issues.
- Both can use telephone, email and physical mail reminders to encourage a customer to make a payment or to contact them to arrange an alternative.
- Both credit management and debt collection may use similar tools, such as credit reports and financial statements, to assess a customer's creditworthiness and ability to pay. Both processes also prioritize maintaining good customer relationships and avoiding negative impacts on a company's reputation.
- Both offer payment plans that allow customers to split the amount that they own into smaller, more manageable payments over time.
- Both are hugely important to maintain a business’s cash flow and resolving the issue of late payment of invoices, which is an all too common problem for most companies.
Debt collections with Chaser
In addition to credit management automation, Chaser also offers a debt collection service. Chaser’s team of experienced debt collection agents provides a professional yet empathetic approach when it comes to dealing with customers who have not been able to pay your invoices.
One of the main issues that worry companies when it comes to using debt collections is damaging their reputation and customer relationships. However, Chaser’s team of debt collection professionals work with your customers to come to an agreeable solution that works for both parties, and take a polite, persistent approach to get you paid.
The Chaser team will provide regular updates on the progress of collections, allowing you to keep track of all communications with your customers (including customer replies) on the Chaser platform, so it couldn't be easier to stay informed.
With Chaser’s comprehensive debt collections services, you can rest assured that your delinquent accounts will be managed efficiently and with the utmost professionalism. Together we can help bring financial stability to your business by reducing the risk of bad debts. Contact us today to find out more about how we can help you.
