The ultimate guide to commercial debt collections

What is debt collections? Well, let’s take a look

Debt collection is the process of recovering money that is owed by individuals or businesses. Debt collectors typically work on behalf of creditors, such as banks, credit card companies, and other lenders. They may use a variety of methods to collect debts, including phone calls, letters, emails, and even legal action.

This article will explore the world of debt collection, answering ‘what is collections’ discussing how it works, the different types of debt collectors, and the laws and regulations that govern the industry. We will also provide tips on how to deal with debt collectors and how to protect your rights.

What is collections?

Debt collections involve the process of pursuing payments of debts owed by individuals or businesses. 

Typically, a creditor, which could be a bank, credit card company, or any lending institution, will make several attempts to collect a debt that is past due. If these attempts fail, the debt may be turned over to a third-party debt collection agency.

Debt collection meaning in finance

The debt collections definition finance refers to the process of recovering money that is owed to a creditor, such as a bank, credit card company, or other lender. 

Debt collectors may use a variety of methods to collect debts, including phone calls, letters, emails, and even legal action. The goal of debt collection is to recover the full amount of the debt, plus any interest and fees that may have accrued.

Debt collection and recovery is an important part of the financial system, as it helps to ensure that creditors are able to recover the money that they have lent. However, debt collection can also be a stressful and challenging experience for debtors. It is important for debtors to understand their rights and responsibilities when dealing with debt collectors.

What is a debt collector?

What are debt collectors? Debt collectors are individuals or companies that are hired by creditors to recover money that is owed. They may work on behalf of banks, credit card companies, and other lenders. Debt collectors may use a variety of methods to collect debts, including phone calls, a debt collection letter, emails, and even legal action.

How do collections work? 5 steps in debt collection process

Debt collection is a process that begins when a creditor hires a collection agency to recover an unpaid debt. The debt collection process can be stressful and challenging for debtors, but it is important to understand the steps involved in order to protect your rights.

This section will provide an overview of the five main steps in the debt collection process:

Steps in the debt collection process

• Initial contact:

• The debt collection agency will initiate contact with the debtor, typically through a formal letter or a phone call.
• This communication serves to inform the debtor about the outstanding debt, its amount, and the creditor to whom it is owed.
• The collector will request prompt payment of the debt in full.
• It is crucial for debtors to verify the legitimacy of the debt and the collection agency before proceeding.

• Negotiation and communication:

• Debt collectors may be open to negotiating payment arrangements with the debtor.
• This could involve creating a structured payment plan that aligns with the debtor's financial capabilities.
• The collector might also consider settling the debt for a reduced amount.
• Effective communication and cooperation between the debtor and the collector are essential during this phase.
• Debtors should explore all available options and document all communication with the collector.

• Legal action and litigation:

• If the debtor fails to respond to the collector's attempts at contact or neglects to adhere to agreed-upon payment terms, the collector may pursue legal action.
• This typically involves filing a lawsuit against the debtor in court.
• The debtor will receive a formal notice of the lawsuit and will have the opportunity to respond and present their case.
• Legal representation may be beneficial for debtors facing a lawsuit.

• Judgment and court order:

• If the court rules in favor of the debt collector, a judgment will be issued against the debtor.
• This judgment legally obligates the debtor to pay the outstanding debt, potentially including additional interest, fees, and court costs.
• The debtor's credit report will likely be negatively impacted by the judgment.

• Enforcement and collection:

• If the debtor fails to satisfy the judgment, the debt collector can pursue various enforcement measures to collect the debt.
• These measures may include:
  • Wage garnishment: A portion of the debtor's wages is withheld by their employer and remitted to the collector.
  • Bank account levy: Funds are directly seized from the debtor's bank account.
  • Property liens: A lien is placed on the debtor's property, potentially preventing its sale or transfer until the debt is paid.
  • Asset seizure: In certain cases, the collector may be authorized to seize and sell the debtor's assets to satisfy the debt.

When is the right time to escalate a late payment to a debt collection agency?

While it might seem like escalating an unpaid invoice to a debt collector is a worst-case scenario, it’s more productive to think of it as just another tool in your credit control toolkit. As with all tools, you need to know how, and when to best use them. 

Escalating to a debt recovery service too early can put a strain on the relationship you have built with your customer. But, using the tool correctly, and escalating the invoice at the right time is in many cases the difference between getting the invoice paid, and writing the debt off.

So, when is the collection process for overdue balances started? Let’s take a look.

To help you understand when the best time to engage in debt recovery services is, we’ve put together a timeline below for effective debt recovery.

1-3 days after invoicing

If your company has provided a service or product and payment isn’t immediately forthcoming, it can be tempting to immediately reach for the big guns, especially if that unpaid invoice is crucial to your cash flow. 

It can be easy to embrace the worst-case scenario and assume you’re never going to get paid. However, it’s worth remembering that genuine mistakes do happen.

Once your payment deadline has passed, don’t be afraid to send a firm, but polite and still friendly, email requesting payment. Ask your client to contact your company if they are having trouble paying. Remember to attach a copy of the original invoice.

7 days after invoicing

After seven days, it’s time to apply a little more pressure. Contact your client again with a slightly more sternly worded email informing them that their payment is still outstanding. Give them a set period to make payment before you further escalate the matter. 14-days is reasonably standard.

To apply a little more gentle pressure, you can also state that, as per the Late Payment of Commercial Debts (Interest) Act of 1998, you have the right to claim late payment interest and compensation covering the “reasonable costs” incurred while recovering the debt.

21 days after invoicing

After 21 days, it’s best to deploy the personal touch. Emails are easy to ignore; phone calls are not.

Contact your client directly or escalate it to a senior member of staff. During the call, remain polite and empathetically, but stress that this is the last chance for your client to arrange for payment to prevent further escalation. For guidance, we’ve prepared 6 phone call scripts that help get invoices paid over the phone.

You have the discretion to allow more time to facilitate payment, but you are also entirely within your rights to contract debt recovery services if payment isn’t made.

More than 30 days after invoicing

More than 30-days is usually considered to be the rubicon when it comes to unpaid debt. If your client has ignored all other payment requests, it’s time to contract with a reliable debt collections agency.

Collections vs debt

Collections and debt are two closely related terms that are often used interchangeably. However, there are some subtle differences between the two.

Collections

The credit collection process is focussed on recovering money that is owed to a creditor. This can include debts owed by individuals, businesses, or governments. Collections can be handled by the creditor directly or by a third-party collection agency.

Debt

Debt is a legal obligation to pay money or goods to another party. Debt can arise from a variety of sources, such as loans, credit card purchases, and unpaid invoices. Debt can be short-term or long-term, and it can be secured or unsecured.

Key differences

The key differences between collections and debt are as follows:

• Collections is the process of recovering money that is owed, while debt is the legal obligation to pay money or goods to another party.
• Collections can be handled by the creditor directly or by a third-party collection agency, while debt is typically handled by the creditor directly.
• Collections is typically associated with short-term debts, while debt can be short-term or long-term.

How to measure the success of your business collections?

Measuring the success of your business collections is crucial for evaluating the efficiency of your collection efforts and identifying areas for improvement. Here are some key metrics to consider:

1. Collection effectiveness ratio (CER)

CER measures the efficiency of your debt collection procedures. It is calculated by dividing the amount of money collected by the total amount of outstanding debt. A higher CER indicates a more successful collection process.

2. Average collection period (ACP)

ACP measures the average time it takes to collect outstanding invoices. It is calculated by dividing the total number of days outstanding receivables by the average daily sales. A lower ACP indicates a more efficient collection process.

3. Days sales outstanding (DSO)

DSO measures the average number of days it takes for customers to pay their invoices. It is calculated by dividing the total accounts receivable by the average daily sales. A lower DSO indicates a more efficient collection process.

4. Percentage of bad debt

The percentage of bad debt measures the amount of money owed to your business that is unlikely to be collected. It is calculated by dividing the total amount of bad debt by the total amount of accounts receivable. A lower percentage of bad debt indicates a more successful collection process.

5. Collection cost ratio (CCR)

CCR measures the cost of your collection efforts. It is calculated by dividing the total cost of collection by the total amount of money collected. A lower CCR indicates a more efficient collection process.

6. Customer satisfaction

Customer satisfaction is an important metric to consider when evaluating the success of your collections process. It is important to ensure that your collection efforts do not damage relationships with your customers.

5 best practices for efficient business collections

Effective business collections play a crucial role in maintaining cash flow, optimizing financial stability, and fostering positive customer relationships. 

By implementing proven best practices, businesses can enhance their collection processes, minimize outstanding receivables, and secure prompt payments from customers. Here are the top five best practices for efficient business collections:

Clear payment terms and conditions

• Explicitly state payment due dates: Avoid ambiguity by clearly specifying when payment is expected (e.g., "Net 30" means payment is due within 30 days of the invoice date).
• Outline accepted payment methods: Indicate which payment methods you accept (e.g., credit card, check, ACH transfer) and provide relevant details like bank account information for wire transfers.
• Detail late payment penalties and interest charges: Discourage late payments by clearly outlining the consequences, such as late fees or interest accrual on overdue balances.
• Include dispute resolution procedures: Explain how customers can raise payment disputes and the steps involved in resolving them.
  
  

Prompt and accurate invoicing

• Timely invoice issuance: Send invoices as soon as possible after providing goods or services to ensure prompt payment.
• Accurate invoice details: Double-check all invoice information, including customer details, item descriptions, quantities, prices, and total amounts due, to avoid payment delays due to errors.
• Clear and organized invoice layout: Use a professional and easy-to-understand invoice format that clearly displays all relevant information.
• Multiple invoice delivery options: Consider offering various invoice delivery methods, such as email, postal mail, or online portals, to accommodate customer preferences.
  
  

Proactive communication

• Payment reminders: Send friendly reminders before the payment due date to prompt customers to pay on time.
• Follow-up on overdue invoices: Contact customers with overdue invoices promptly via phone, email, or letter to inquire about the payment status and address any issues.
• Maintain a professional and courteous tone: Even when dealing with overdue payments, maintain a professional and respectful demeanor to preserve customer relationships.
• Document all communication: Keep a record of all communication with customers regarding payments to track progress and resolve disputes.
  
  

Flexible payment options and incentives

• Multiple payment methods: Offer a variety of payment methods to cater to customer preferences and make it easier for them to pay.
• Payment plans: Consider offering payment plans for large invoices to make them more manageable for customers.
• Early payment discounts: Incentivize early payment by offering discounts to customers who pay before the due date.
• Autopay options: Allow customers to set up automatic payments to streamline the process and reduce the risk of late payments.
  
  

Professional debt collection

• Internal collection efforts: Start with internal collection efforts, such as sending reminder letters and making phone calls, before escalating to external agencies.
• Debt collection agency: If internal efforts are unsuccessful, consider hiring a reputable debt collection agency to recover outstanding debts.
• Legal action: As a last resort, you may need to pursue legal action to recover unpaid debts. Consult with an attorney to understand your options and the potential costs involved.
  
  

Chaser Collections

Chaser Collections provides a considerate debt recovery service for small-medium businesses, that gets your overdue invoices paid without damaging customer relationships.

Powered by Chaser Credit Control software, Chaser Collections is the first service of its kind, combining data driven insights with invoice chasing expertise. Your customer relationships are prioritised, which leads to a higher success rate. We act as an invaluable external mediator to resolve a situation that you may have written off as hopeless. And, you have complete peace of mind throughout the whole process as all communication is logged within the Chaser software, ready for you to view.

By signing up for Chaser, you automatically have the option to use Chaser Collections - you can escalate invoices to our collections service with just three clicks! The no win no fee service is priced separately to Chaser, and all pricing can be viewed upfront within your Chaser account. To understand more about what Chaser Collections is, how it works, and why it’s the perfect solution to your overdue invoice problem, you can download your fact sheet here.

With Chaser Collections, you can expect the following:

1. Easy and simple escalation

The Chaser credit control software brings all your accounts receivable actions into one simple location.

By using Chaser you can provide your customers with flexible payment options, a Payment Portal that puts all the relevant information at your fingertips and a fully automated process that still has your business’ personal touch.

That same ease-of-use and “one application only” approach applies to our debt collection services. You can escalate an unpaid invoice to our collections team with just a few clicks within the Chaser software, saving you time so you can spend it on your business.

2. Protecting your business relationships

We know exactly how important it is for you to maintain a positive relationship with your customers. We feel the same about our customers.

That’s why, when you escalate an unpaid invoice to our collections team, you can be sure that our highest priority is maintaining the relationship between you and your customers. We work to get you the money you’re owed in an agreeable manner for both parties, without damaging your reputation.

We don’t believe that the debt collection process has to be aggressive or antagonistic. We are always working to make sure your customer has the largest number of options available to ensure the smooth and fair repayment of debts.

Using our ‘people-first’ approach, we actively work with your customers to find a solution that benefits both you and them.

3. Time saved

Time is money, especially for small businesses. Chasing late payments costs both time and money, as much as £500 a month on average. Our ground-breaking AR software makes it as simple as possible for you to chase late payments.

You can schedule payment reminders, provide your customer with all the relevant information, put payment links right in the reminder, and keep track of all your outstanding payments from one central location.

Our friendly debt collections service uses the same time-saving principles as the rest of the offerings. You pass the issue over to us and we keep you updated throughout the entire process, letting you spend your valuable time on the other parts of your business.

4. Integrated software

Because our collections services are a fully integrated part of our software, you don’t even need to give us a handover. All the information we need on your unpaid invoices is contained within our system and can be forwarded to our collections department with just a few simple clicks.

5. Full transparency

We always operate with full transparency, which is why you’ll be able to see a full record of all the interactions with your customers. By combining our collections services with our Chaser credit control software, you’ll stay informed, every step of the way.

6. Ethically trained debt collectors

Our team on the ground are consummate professionals who fully embody the idea of fair but firm collection service. All of our collections team are CICM-trained. They approach each and every collection with compassion and professionalism to get the best result for you, whilst keeping your customers happy.

7. Instant quotes and clear prices

As soon as you escalate an outstanding invoice through the Chaser software, you’ll be given an instant quote and a breakdown of what the collections will cost. With Chaser, you only pay for what you use, making us a hugely cost-effective alternative to traditional debt collection agencies.

Key takeaways

• Collections is the process of recovering money that is owed, while debt is the legal obligation to pay money or goods to another party.

• Collections can be handled by the creditor directly or by a third-party collection agency, while debt is typically handled by the creditor directly.

• The key metrics for measuring the success of your business collections include Collection Effectiveness Ratio (CER), Average Collection Period (ACP), Days Sales Outstanding (DSO), Percentage of Bad Debt, Collection Cost Ratio (CCR), and Customer Satisfaction.

• Best practices for efficient business collections include clear payment terms and conditions, prompt and accurate invoicing, proactive communication, early intervention, and ongoing monitoring and review of collection performance.

• Debt collection can be a complex and time-consuming process, so it's important to consider outsourcing to a professional debt collection agency if you have a large number of outstanding debts or if you're struggling to collect on your own.

FAQs

This FAQ section provides answers to some of the most common questions about debt collection, including what debt collectors can and cannot do, how to dispute a debt, and what to do if you're being harassed by a debt collector.

What's a collection agency?

A collection agency is a third-party company that specializes in recovering money owed to creditors. They are typically hired by creditors when they have been unable to collect a debt on their own. Collection agencies use a variety of methods to collect debts, including sending letters and emails, making phone calls, and visiting debtors in person.

How do debt collection agencies work?

Debt collection agencies (DCAs) specialize in recovering unpaid debts for creditors. They follow a process that includes initial contact, validation of the debt, communication with the debtor, negotiation of a payment plan, and potential legal action if payments are not made. DCAs are regulated by laws that protect debtors from harassment and unfair practices. 

What does ‘sent to collections’ mean?

When someone says that an account has been "sent to collections," it means that the creditor has turned the debt over to a third-party collection agency in an attempt to recover the money owed. Collection agencies are companies that specialize in collecting debts on behalf of businesses and individuals. 

Who does credit collection services collect for?

Credit collection services collect debts on behalf of businesses and individuals. These debts can include unpaid invoices, overdue bills, and other financial obligations. Credit collection services work to recover these debts through various methods such as phone calls, letters, and negotiations.

What is a loan collection? 

A loan collection is the process of recovering money that is owed on a loan. This can be done by the lender directly or through a third-party collection agency. 

The lender may use a variety of methods to collect the debt, such as sending letters and emails, making phone calls, and visiting the debtor in person. If the debtor does not repay the loan, the lender may take legal action, such as filing a lawsuit.

What happens when a business cannot collect what’s owed?

Uncollected debts can lead to cash flow problems, increased costs, a damaged reputation, and potential legal problems for businesses. 

To prevent this, businesses should implement a clear collections process that includes clear payment terms, prompt invoicing, proactive communication, early intervention, and performance monitoring. If internal collection efforts fail, businesses can consider using a professional debt collection agency.

What is debt settlement?

Debt settlement is a process of negotiating with creditors to reduce the amount of debt owed. It is typically done when a debtor is unable to repay the full amount of debt owed. Debt settlement can be a beneficial option for debtors who are struggling financially and need a way to resolve their debts. However, it is important to note that debt settlement can have negative consequences, such as damage to credit scores and potential legal action from creditors.

What happens to one’s credit when their debt is not paid?

When a person's debt is not paid, it can have a significant impact on their credit score. A credit score is a number that lenders use to assess a person's creditworthiness, and it is based on factors such as payment history, credit utilization, and length of credit history. 

When a debt goes unpaid, it is reported to the credit bureaus, which are the companies that calculate credit scores. This can result in a lower credit score, which can make it more difficult to obtain loans, credit cards, and other forms of credit in the future.

How long can a debt collector attempt to collect a debt?

The statute of limitations on debt collection varies from state to state and from country to country. How often debt collectors can take you to court in the UK is different from in the US.

In general, debt collectors have between three and six years to attempt to collect a debt before they are barred from taking legal action. 

However, there are some exceptions to this rule. For example, in some states, the statute of limitations may be tolled, or paused, if the debtor makes a payment on the debt or acknowledges it in writing.

 It is important to note that the statute of limitations only applies to legal action, and debt collectors may still attempt to collect a debt even after the statute of limitations has expired.