6 harsh realities of debt recovery (and how to deal with them)

21/09/2021

If you’ve ever had to recover an overdue invoice from a difficult customer, you’ll know that the process is rarely straightforward.

With plenty of difficult conversations ahead and the adverse impact it can have on your cash flow and longer-term customer relationships, there are a number of challenges when it comes to debt recovery.

Fortunately, though, for every challenge there are various solutions.

So here are six harsh realities of recovering overdue debt along with ways to overcome them. Plus, we share some helpful resources to further improve your debt recovery efforts.

Debt recovery reality 1 - Debt recovery isn't easy

Harsh reality No. 1: Debt recovery isn’t easy

In an ideal world, you’d provide a product or a service and then the customer would pay. There would be no need for a credit control function at all. But unfortunately, this isn’t always the case, and the process of recovering overdue invoices can be a tiresome and costly process.

What can you do?

1. Act quickly

The sooner you contact your customer after their invoice becomes overdue, the more likely you are to collect the payment in full.

Some businesses will naturally give their customer the benefit of the doubt, and wait a few days before contacting them. But there are a number of reasons to contact them straight away. They may have forgotten to pay, misplaced your invoice or even not received it in the first place.

And if they are deliberately not paying, perhaps due to financial pressure, it’s even more important to remind them immediately – thereby demonstrating you’re hot on credit control and don’t tolerate late payment.

So, send an email reminder that the invoice is overdue as soon as you can. Then, adapt your subsequent communication according to the response received (or not received).

2. Know exactly when each invoice becomes overdue

To be able to act quickly, it is vital you know exactly when an invoice is going to become overdue.

You can achieve this by regularly reviewing your sales ledger to ensure that your customers’ payment activity is always observed and any upcoming payments or overdue invoices are flagged accordingly.

This will allow you to be efficient and punctual with your debt recovery activity so that any delays are limited and the impact on your cash flow is reduced.

3. Keep detailed records

You should always keep a record of all invoices, letters, emails and phone calls with customers. This information acts as evidence that will support your debt recovery efforts should you need to instruct a debt recovery agency or take legal action.

On the topic of paperwork, your terms and conditions can also be a great tool for protecting your business. By clearly stating what you expect from the client and what they can expect from you from the outset of your relationship, you are setting expectations that could help to limit disputes and avoid any potential surprises in the future.

So ensure these are signed by the customer before the point of sale, confirming their acceptance of your terms.

Here are some resources to help you:

Harsh reality No. 2: Customers don’t always tell the truth

Collecting overdue invoices would be much simpler if all customers told the truth. But, unfortunately, some customers will do anything they can to stall or avoid making a payment.

What can you do?

1. Be sceptical

When a customer gives you an excuse for late payment it can be challenging to know if they are being genuine or not. Being able to identify fake excuses can speed up the debt recovery process.

One way of doing this is to have specific procedures in place to deal with the most common excuses.

For example, if a customer says the cheque is in the post, ask for the cheque number and postal date and confirm they have the correct company address. If they are being genuine they will know all of these details. If they’re not you can then ask for payment over the phone.

2. Offer a selection of payment methods

You can give your customers fewer excuses not to pay by making it easier for them to pay you. Offering a selection of payment methods is a good way to do this. Given the speed of online banking, BACS, direct debit and credit cards are often the preferred method of payment.

Whichever options you choose to accept, make sure that your invoices include the information customers will need to make a payment.

3. Always follow through on warnings

If your customers think that they can get away with paying late they may continue to delay payments to preserve their own cash flow.

That’s why it’s vital to demonstrate a persistent and professional debt recovery approach and always follow through on warnings such as charging late payment interest, outsourcing to a debt recovery agency or taking legal action.

Not only will this encourage them to pay what they owe, but it will also make them think twice about doing it again in the future.

Here are some resources to help you:

Harsh reality No. 3: Sometimes you have to get tough to get paid

Some customers will avoid making payment for as long as they think they can get away with it. In these circumstances, some stronger tactics can be used to encourage them to quickly settle outstanding invoices.

What can you do?

1. Put the customer on a stop list

When a customer persistently misses invoice due dates they should be put on a stop list and all services withheld until payment has been received.

This not only demonstrates that you don’t tolerate late payment, but it also protects your cash flow from further damage.

Often this action encourages the customer to settle all outstanding invoices, especially if they value or depend on your product or service.

2. Charge late payment interest

Under the Late Payment of Commercial Debts (Interest) Act, businesses have the right to charge their customers compensation and statutory interest on any overdue invoices to help cover debt recovery costs.

Sometimes simply informing your customers that you charge late payment interest can be enough to encourage them to settle the invoice as soon as possible, and it’s up to you whether you then choose to enforce it.

Calculate the interest you’re owed here

3. Bring in additional help

When chasing overdue invoices, there can be a fine line between dedicating time to recover payment and this being counter-productive.

If you spend too much energy and resource chasing overdue accounts, it can be to the detriment of other invoices.

So it’s important to be able to recognise when your internal efforts aren’t working or are consuming too much time. In these instances, instructing an external debt recovery agency could be more beneficial.

With extensive experience in collecting payments from businesses of all shapes and sizes, a specialist commercial debt recovery agency will use the right blend of understanding, sector knowledge and rigour to bring a successful conclusion to your case.

Plus, the added weight of third party intervention can often be enough to show that late payment will not be tolerated and encourage the customer to pay up.

Get a debt recovery quote

Here are some resources to help you:

Harsh reality No. 4: Not all debts are collectable

Sometimes, no matter how efficient and effective your credit control processes are, outside forces can make some debts uncollectable. For example, if a customer unexpectedly experiences cash flow difficulties and enters insolvency. Fortunately, with the right preparations, you can plan ahead and protect your business from future uncollectable debts.

What can you do?

1. Get to know your customers

You can reduce the chances of accepting orders from uncreditworthy or risky businesses by getting to know your customers and the industry they operate in before offering credit terms.

There are numerous ways you can obtain this important information, including using account opening forms, performing credit checks and checking the Prompt Payment Code.

Should any of these sources reveal information that suggests the customer poses a risk to your cash flow, you can take the necessary steps to protect your business.

2. Protect your cash flow

Did you know that you can protect your cash flow against the risks of bad debt?

Obtaining credit insurance provides peace of mind when trading on credit terms by protecting against the threat of bad debts, whether due to insolvency or protracted default.

In the event an invoice becomes aged or a customer enters insolvency proceedings, credit insurance ensures that you get paid for any goods or services you have supplied, subject to a designated credit limit.

3. Collect full or partial payment upfront

Another way to protect your cash flow from uncollectable debts is to take full or partial payment upfront.

Some businesses may be unprepared to pay upfront for goods or services they haven’t yet received, so this tactic is often reserved for those who have shown signs that they might not be able to pay.

Here are some resources to help you:

Harsh Reality No. 5: Your cash flow is at risk

Once an invoice exceeds terms it starts to have an impact on your cash flow. Without appropriate action, this can quickly escalate throughout the business and make it difficult for you to meet your own commitments, such as paying suppliers and employees. Therefore, you should have plans in place to monitor your cash flow and ensure that you don’t become the one being chased for payments.

What can you do?

1. Update cash flow forecasts

To maintain a healthy cash flow, you need to be aware of exactly what’s going in and out of your company at all times.

Therefore, you should update your cash flow forecast as soon as you identify that an invoice is going to exceed its credit terms.

This allows you to spot any impending gaps in the business’s cash flow and put plans in place to improve your position.

2. Spread your customer base as widely as possible

One late payment is undesirable, but if that customer accounts for a large portion of your revenue it can destroy a business.

Therefore, to protect your cash flow you should attempt to spread your customer base as widely as possible, rather than rely on a small number of customers.

3. Build a cash reserve

A cash reserve is money that a business sets aside for use in emergencies. These savings can cover any shortfalls or unexpected costs and expenses that might arise.

A healthy cash reserve will buy you time and peace of mind when it comes to your cash flow, and potentially be used to offset the cost of debt recovery.

Here are some resources to help you:

Harsh reality No. 6: Not all debt recovery agencies are the same

Should you require external help to collect unpaid invoices and you choose to outsource its collection to a debt recovery agency, it’s vital that you find a company who meets your expectations. Although it’s easy to find an agency online, selecting the right match for your business can be more difficult, but there are things you can do to make the process easier.

What can you do?

1. Find a debt recovery agency before you need them

Many businesses wait until they have a debt recovery need before finding a debt recovery agency. However, the pressure to get paid can mean that businesses make a quick decision and choose a debt collection partner that isn’t right for them.

Instead, it’s wise to look for a debt recovery agency ahead of needing their services. This way you give yourself more time to ensure they are the right fit for your business.

You could even set up an agreement where you outsource all debts that reach a certain age to relieve the pressure from your internal team.

2. Do your research

There are lots of debt recovery agencies in the UK, so it’s important to do your research to find the company that will bring the best results for your business.

There are various ways you can do this. Firstly, you want a relationship with a debt recovery agency that is going to bring results, so check that they have sufficient collections knowledge and experience.

As well as this, look for success stories and testimonials to ascertain if they have a successful background.

When it comes to trickier debts, sometimes sector expertise can bring knowledge and results to rival a typical generalist, so you might want to consider their experience in your industry.

Finally, check for affiliations with leading industrial bodies such as the Credit Services Association (CSA) to ensure that the agency maintains the highest standards.

3. Understand the process

Different debt recovery agencies may use different methods to recover outstanding payments. While some adopt a hard-line approach and believe the legal route represents the best way to secure payment from customers, others prefer a more subtle, pre-legal strategy.

Each approach has different pros and cons, so it’s important to understand the differences and decide which option is best for your needs.

At Hilton-Baird Collection Services, for example, we believe that polite and professional mediation offers the greatest chance of bringing a successful conclusion to often complex cases. This allows us to preserve customer relations and not burn any bridges that the legal route often does.

Here are some resources to help you:

If your business is struggling to recover any overdue invoices, we could help. Contact our team on 0800 9774848 or request a call back to see how we could work with you to help you get paid. If you would like to find out more about us, please view our success stories and accolades pages.