Common Debt Collection Mistakes And How To Avoid Them
Introduction
For many businesses, debt collection is an unavoidable reality. If you supply goods or services on credit and your customer or client does not pay, you must take steps to recover payment. However, the debt collection process can be complicated and full of potential pitfalls. In this blog post, we take a look at the common debt collection mistakes we see and how to avoid them.
Common Debt Collection Mistakes
The common debt collection mistakes we see are, as follows.
Poor Contract Practices
A lot of debt collection mistakes arise before an invoice is even rendered. For many businesses fail to enter into a written contract with their customer or client.
Before agreeing to supply goods or services, it is vitally important that you enter into a written contract with your customer or client. Your written contract should:
- Identify the correct legal entities. These are known as the parties to the contract.
- Accurately describe the goods and/or services that are to be supplied.
- Include clear payment terms.
- Make provision for the customer or client to pay contractual or statutory interest if a payment is late.
- Make provision for the customer or client pay contractual legal costs if a payment is late.
Poor Credit Control Practices
Poor credit control practices are another common debt collection mistake. These might include:
- Failing to get a customer or client to complete a credit application form.
- Failing to have a credit policy.
- Failing to credit check new and existing customers and clients.
- Not setting credit limits.
- Failing to stay in regular contact with the customer or client.
- Failing to escalate appropriately.
These mistakes can be avoided by:
- Drafting a credit policy for your business.
- Having every new customer or client complete a credit application form.
- Credit checking every new and existing customer or client.
- Setting credit limits based upon the potential risk of default.
- Speaking regularly with customers and clients on the telephone.
- Escalating things immediately when an invoice becomes overdue.
Waiting Too Long To Act
Time is of the essence when it comes to debt collection and waiting too long to act is a common debt collection mistake. This can be avoided by having a clear credit control policy and procedures that are activated as soon as an invoice falls overdue.
Ignoring Early Warning Signs
When it comes to debt collection, many businesses ignore early warning signs. These might include:
- Changes in payment behaviour.
- Requests for extended payment terms.
- Varying excuses for late payment.
- Sudden lack of responsiveness.
These can be combatted by:
- Training staff to identify red flags.
- Tightening payment terms where risks are identified.
- Reducing credit limits.
- Requesting payments up front.
Poor Communication
Poor communication is another common debt collection mistake. This can be remedied by remaining in regular contact with your customer or client via personal meetings, telephone calls and e-mails. Businesses should, at all times, have the correct contact details of the person responsible for arranging payments.
Allowing Disputes To Take Up Time
Allowing disputes to take up time can be costly and cause problems with cash flow. As we set out in our previous blog post, when dealing with a disputed invoice, businesses should:
- Acknowledge receipt of the dispute as soon as possible.
- Set a timeframe for resolution.
- Carry out an investigation immediately.
- Inform your customer or client of the outcome.
- Resolve the situation as quickly as possible.
Failing To Instruct A Firm Of Debt Collection Solicitors
Many businesses try to do everything in-house and fail to instruct a firm of debt collection solicitors or do so when it is far too late. Instead, businesses should view legal support as a strategic tool, rather than a step of last resort.
Overlooking Commercial Objectives
Almost every businesses is run to make a profit and this should inform decision making at every step of the debt collection process. Businesses should keep an eye on costs and wider commercial objectives, such as ongoing trading relationships.
Conclusion
There are a number of common debt collection mistakes. By avoiding them, businesses can improve cash flow, improve customer relationships and become more profitable.