It’s never fun to collect on an outstanding account; however, the costs of collecting an overdue debt can be high over a period of time and put a big hole in your profit margin. It is therefore recommended that you systemize your collections process.
Firstly, implement a system that insures you are alerted at least weekly of accounts that become overdue, and then begin a series of communications with the debtor that continues until the outstanding amount is collected. The most effective collection systems use a combination of telephone calls and letters to get results.
Collection efforts should be made in a series of communications that gradually increase the pressure on the debtor, ranging from a gentle reminder to warning of court action. A standard four-step system can be used in most instances, bearing in mind that communications back from the debtor may require some variation.
Step 1: A written reminder that the debt is overdue
Step 2: A written reminder of the previous communication, plus a specific date for payment
Step 3: A final demand for payment by a specific date
Step 4: Warning that legal action is about to commence unless payment is received immediately
The first notice just serves as a “reminder” and gives the customer time to make payment within a reasonable period of time. It also gives him/her a chance to query the amount or any other details of the account.
The notice should be sent to the person in your customer’s company who has the authority to deal with the outstanding account and process the payment. It should be a formal piece of correspondence and be limited to reminding about the overdue account, not any other matters that may be occurring between you and the debtor.
If there’s no response to the first notice you can use either a reminder letter or a phone call to follow up. Using a letter is common when the amount is not significant. It should mention that the first notice has not been acted on and that now you would like payment by a certain date. Seven days or so is recommended.
If it’s a large amount in question, you might prefer to use the telephone and speak to the person responsible for paying the account. Talking personally indicates a stronger degree of concern than a letter.
In a telephone call, always try to get a commitment to payment. If you get any excuses that don’t sound convincing – the usual ones are claiming the payment was made some time previously – promise to investigate the situation immediately and respond with details within 24 hours. If your debtor gives you a verbal commitment to pay, send him/her a letter or email that restates this commitment and informs him/her that you’ll be looking for this payment by the agreed upon date.
If you need to go to the next stage, making a final demand, you should definitely use a letter for legal reasons, but accompany it with a telephone call that tells them the letter has been sent and offer the debtor a final opportunity to make payment before legal action is necessary.
Legal action itself should only be taken when you’re certain that this is going to be the only way to recover the outstanding amount. Remember that legal action incurs additional costs and takes up your time. Even if you win, the court may order payments to be spread over a period of time. Legal action should only be taken as a last resort.