Four stages of debt collection

Bad debt is inherently bad for business. With less than three months to Christmas, small businesses should be thinking about how to prevent write-offs  from occurring and how to best collect any outstanding debts before the year is over. 

D&B data shows that the longer debts are outstanding, the less likely the money will be recovered - an overdue account is 1.7 times less likely to be collected if it's 91-150 days old, compared with those that are 31-90 days old. As a result, the largest portion of debt is recovered in the first three months of becoming delinquent. 

Time is of the essence when it comes to collecting the money owed to you - here are four steps to guide you through the collections process.

5-7 days late

At this relatively early stage, assume the bill has been somehow overlooked. There is a high chance that the invoice was never sent, or sent but not received, or simply forgotten.

Sending invoices by email may be a quick and easy way to communicate with your customers, but it is also easy for them to leave the email lying in their inbox, unopened and unread. For peace of mind, change your email settings so that you receive an alert when your email has been opened. If you receive the alert but still have not received payment, follow up with a phone call or email gently reminding them that the payment is due.

According to the Australian Competition and Consumer Commission (ACCC), it is necessary and reasonable for you to contact a debtor regarding a payment, as long as you do not use intimidation, demoralising or embarrassing tactics.

A phone call or email along the following lines is ideal:

"Your payment of $2,000 has not yet been received. Please check on it promptly. Thank you."

Alternatively, you can also send your customers a physical invoice, but ensure you take into account the time it takes to reach them and the amount of time it spends sitting in the post office or mailroom.

15-21 days late

If you believe that your customer has received the invoice but the account remains outstanding, assume that the customer won't or can't pay.

You should engage in a conversation with them, such as:

"Your payment of $2,000 is overdue. Is there a problem we may help you with? As you know, we cannot provide further product until the overdue amount has been submitted. When can we expect your payment?"

This reminder should prompt them to check on their progress of the payment - in some cases, there might have been a lag in the finance department or in getting the invoice signed off and approved.

45 days late

If there is no response, this means that you have now not been getting the money owed to you for more than a month, and it's safe to assume the customer can't or won't pay because of a serious problem.

While you don't want to damage the business relationship with your clients, at the same time you don't want to compromise your cash flow cycle  for a non-paying customer.

You should communicate to them the severity of non-payment, but again, without appearing aggressive.

"Your account is overdue. You have not responded to our earlier requests. This is our final reminder and if payment is not received in seven days, we regret that further action will be taken."

60 days late

At 60 days past due, assume you have lost this customer and want to recoup as much as you can.

Your message to your customer should be as follows:

"We have made several requests for payment without a response. We have referred your account to a collections agency."

As most small businesses don't have a specific in-house collections team, this can mean that the business owner or manager is usually responsible for following up overdue invoices. This process can exhaust considerable time and effort, so it's critical to speak with a reputable collections agency at this stage to avoid undue stress.

Good debt collectors understand that their job is to recover the money you are owed, while helping you maintain customer relationships and protect your brand. They can also escalate pressure as needed to get your cash back sooner.

Accounts receivable is a large and critical part of any business, so ensure you take the necessary steps to collect overdue accounts and restore your cash flow cycle.

Read more information on D&B Collect, Dun & Bradstreet's debt collection service for SMEs here.

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