Debt recovery is a very important function for any successful business. When you don’t manage to successfully recover money from your debtors, then you have effectively given out your merchandise for free. This is not a sustainable way of doing business. As it is with all aspects of your business, you need to have a functioning strategy to ensure that your are successful in most (if not all) of your debt recovery efforts. Unfortunately, most businesses make mistakes that make it difficult (or even impossible) to successfully collect from your debtors, here are some common mistakes that you should watch out for.
- Not putting everything on paper
This really should not be a problem for any serious business owners, but a surprising number of businesses still fail to create a paper trail for all the business transactions that they undertake. Every transaction needs to be documented on paper. This is usually the only way to ensure that the debt collection process is successful. It is very difficult for the legal system to be on your side if you cannot prove that a debt exists in the first place.
When you extend credit to a client, ensure that you sign a legal document clearly outlining the amount owed, and including the terms of payment that both parties have committed to. For larger debts, you probably should involve a legal practitioner in the contract drafting and signing. A contract with the debtor’s signature will go a long way towards strengthening your case during debt collection.
- Not having an effective vetting system
Debt is a way of life in business. You can’t successfully run a business if you don’t extend credit to some clients. Unfortunately, most of the clients that you are tempted to extend credit to are those that purchase in bulk. Therefore, if they default on your debt you will lose a significant amount of money. To minimise this risk, you should ensure that you have an effective system to screen out those who qualify for debt, and those who carry too much risk.
It is now very easy to enquire about the credit rating of your clients. There are companies whose sole duty is to analyse the debt history of a potential debtor. These companies can find out whether your customer is likely to default on debt, or whether they have a history of declaring bankruptcy.
- Not collecting adequate information from your debtors
You need to have all the relevant details from your clients before any credit is extended to them. This information is useful for your records. It also helps you track them down should they default on your debt. You should know the client’s name, place of business (including the physical address), contact details (e-mail, phone and possibly a home address) as well as a copy of the client’s drivers licence. This allows you to identify and/or track down a delinquent client.
- Not engaging the services of a debt collection agency
The debt collection process has many legal requirements that you might not be aware of. It is also a very time consuming process that can be costly for those who are unfamiliar with the process. Your best bet for success is working with an expert debt collection agency.
It is recommended that you retain a debt collectors part of your cash flow management strategy. Even though you may not have an active debt at the time, you can develop a working relationship with the collection agency. When you need their services, a debt collection company will know how to work within the existing legal framework to get your money back.
As with all professional services, you need to do some research. Ensure that you are working with the right debt collector. Find out their accreditation details as well as reviews from past clients to guide your decision making process.
- Not having a system to notify debtors on the status of their debts
You might find that your efficiency in persuading clients to meet their debt obligation improves when you have a notification system. It sends them a polite reminder regarding the status of their debt. If you are out of mind, a client might forget to include your debt in their budget. Make a point to send an email or text a few weeks before a payment is due. This is a process that can be easily automated. In some jurisdictions, it might strengthen your debt collection case if you can prove that you sent adequate reminders to your debtor.
Make a point of consulting with a debt collection professional on how to finetune your debt management strategy.