Debt Recovery 101: A Stepwise Guide to Business Debt Collection Process

Out of all the financial industry jargon, no term gives business owners more nightmares than ‘debt’ or ‘bad debt’! Why so?

That’s because unpaid invoices can quickly add up and become a source of permanent headaches. Not only that, but it can also hinder a business’s daily cash flow and affect relationships with suppliers and partners as well.

However, if you’re running a business, you will know how normal it is in the practical world to get stuck with late payments, right? And such situations can get even more complicated if you’re dealing with debtors who stay abroad or are dealing with different currencies.

Now, since you own a business, you should follow a definite debt collection process. This ensures that you stay compliant with regulations and protect your business at the same time. So, let’s find out how business debt collection is carried out.

The Debt Collection Process Every Business Should Follow

Debt collection is a complicated process. More so for businesses, because of the array of regulations enforced by the Fair Debt Collection Practices Act (FDCPA). Even the slightest wrong move might lead to you facing a horde of legal liabilities and fines. On top of that, your business also faces the risk of reputational damage, which is worse for your brand image.

Instead, what you do need to follow is a definite debt collection strategy that will help recover your unpaid dues and save you from legal complications.

Steps to take for a successful debt recovery:

Send an invoice as a reminder

If you see that your customer has turned delinquent, the first step is to send an invoice as a reminder for the amount that’s overdue. Sending an invoice is a gentle reminder to the debtor to pay what they owe.

The invoice should contain clear details of the following things-

• The invoice number
• The original date of payment that the customer agreed upon
• The total amount of debt that the customer agreed to pay off
• The reason for which the repayment is being made for
• The payment details and contact information of the payee
• The actions that will be taken if the payment isn’t successful

Other than these, you can also choose to get in touch with the customer separately and discuss the issue. At times, direct conversations work wonders as well!

Note: If you’re running a startup, unpaid invoices can be the reason behind bankruptcy! So, don’t wait till the worst time, and integrate these effective debt collection practices for the best results.

Send out a late payment notice or Letter Before Action (LBA)

Supposedly, you’ve sent the invoice reminder, and haven’t received any reply from the customer’s end. In such a situation, the legal debt collection process is to send a formal late payment notice, also referred to as the ‘Letter Before Action (LBA).

The name itself suggests what this notice is all about. It’s literally the first legal step in this procedure. The LBA should outline details of the payee, the payer, the reason behind contacting the payee, the total outstanding amount the person owes, and when the concerned individual should pay up the dues.

Most importantly, this formal late payment notice should also include the kind of legal action you may take if you don’t receive the payment within the stipulated period.

Continue following up, and stay open for negotiation

After sending out the LBA, continue following up with the customer. High chances are that the customer would be paying up a percentage (if not the whole payment) because of the legal prospects mentioned in the LBA.

One of the major reasons behind customers becoming delinquent is that they might not have sufficient funds available for repayment. If this is the situation, then stay open to negotiation offers. You can set up a customized payment plan for the client. This will help remove the legal pressure from the customer’s end and help you recover your debt successfully.

But if the individual still doesn’t respond to negotiations, you are free to continue with legal proceedings.

Seek help from a professional debt collection agency

The next step in the debt collection process for businesses is to hire a professional debt collection agency. Remember, it’s still not time to proceed legally when there’s hope! Why so?

Because debt collection agencies have expert in-house professionals who are trained to handle delinquent clients effectively. Apart from that, these professionals can also help you maintain your relationships with customers while successfully recovering your overdue payments.

On top of that, professional agencies can also take care of legal proceedings seamlessly. So, hiring them is more like a boon for your business, as you don’t have to waste your precious time or energy on follow-ups.

Try mediation

The penultimate step in the debt collection process flow chart, before proceeding with legal actions, is to try mediation. The best way to do this is to have an absolutely neutral professional who can help both parties reach a common solution or make them come to an agreement.

Now, you may wonder why you should even offer so many chances to a customer whose delinquency has frustrated you to the core. Well, think practically. The entire process of mediation is usually quicker and even less expensive than legal proceedings. Added to that, it’s a hassle-free process. So, it’s best to resort to these ways.

Resort to legal action

Finally, if the client isn’t bothered to pay up your debts anyway, the last option is to move legally. The debt collection legal process might incur some expenses. However, if you have decided to move forward with legal proceedings, you can surely claim interest on the overdue amount that the debtor owes.

Are you sunk in debt, and want to break free from that eternal debt-trap? Explore these 5 hacks and banish debts completely from your life.

Wrapping Up

Overdue invoices might send shivers down your spine. But, you also have to understand that it is a part and parcel of the business landscape. And being a business owner, you have to take wise, thoughtful steps that can help you recover your debts without compromising customer relationships.

So, apart from exploring debt recovery laws, what you need to do is take a proactive approach. So, make sure to go through this blog and learn about the stepwise process that can help you recover your debts seamlessly.

Also, if you want to share your expertise on business or finance, don’t hesitate to send your blogs under our write for us finance category.

F.A.Qs

1. What do I do when a debt collection agency calls?

When a debt collection agency calls, the first thing you should do is verify the debt. Ask for the name of the agency, the name of the original creditor, the amount owed, and a written validation of the debt. Remember to not confirm or deny the debt on the phone until you have this information.

2. What is the 7 by 7 rule in collection?

The “7 by 7 rule” in collections is a strategy where collectors attempt to contact a debtor seven times over seven days. This approach aims to maximize contact attempts and increase the likelihood of reaching the debtor.

3. What is debt settlement, and what are the risks?

Debt settlement involves negotiating with creditors to pay a lump sum that is less than the total amount you owe. This can reduce your overall debt, but it comes with a set of inherent risks. These include damaging your credit score, potential tax implications on the forgiven amount, and the possibility of being sued by creditors if negotiations fail.

4. What will happen if you don’t pay your debt?

If you don’t pay your debt, your credit score will drop. This will make it harder for you to obtain loans or credit in the future. You can also receive collection calls and legal action, which might lead to asset seizure and liens on your property.

5. How to pay off debt step by step?

Start listing out all your debts. This includes their balances, interest rates, and minimum payments. Then, choose a strategy that suits you best. You can opt for ‘debt snowball’ (where you pay off the smallest debts first) or ‘debt avalanche’ (where you pay off the highest interest debts first). This is one of the best approaches to paying off debt in a stepwise manner.

Amilia Brown

Amilia Brown is a seasoned business writer & strategist who simplifies complex business concepts and turn them into engaging narratives. As a trusted business writer, she delivers actionable insights with precision.