It is a fact that most small businesses base the recoverability of a debt against the amount outstanding and the perceived cost of action: I even know of one company boss who set aside a fixed amount of money for all debt recovery action, internal and external in a one year period.

This type of thinking almost ensures the write off of the majority of bad debts. To remind you, a write off of £500 at 10% net profit is equal to £5000 of sales.  

If you are willing to ‘do what it takes’ to resolve the debt, you will usually be successful. Only a very small percentage of debts that are sent to solicitors or debt recovery agents actually end up in court. What they do ‘quickly’ is find the debtor, make contact with the debtor, and agree an arrangement to pay the debt. When dealing with the debtor they are ‘usually’ calm, professional and to a degree understanding: empathy is a very strong tool. They can only do what you could do yourself.
 

If a bad debt is recognized early, say 60 days overdue (60 days allow for two month ends, cheque runs, debtor admin errors or goods/service queries) the factors that allow successful recovery are very much present, being: customer contact, freshness of bad debt, mediation action, payment arrangement possibilities and many more. Trying to resolve a debt at this time is a window of opportunity if you are willing to negotiate one or more of the following options:  

• Agree instalment payments,  

• If the customer is using a quality of goods/service type of excuse for non-payment etc, agree a reduction in the amount payable and then if necessary payment arrangements,  

• Supply more goods/services for cash and some payment each month to reduce the bad debt,  

• Put the  complete debt on hold until the customer can reduce/settle the debt, and continue to supply goods/services on a cash or strict credit basis,  

• Take/use/sell some of the customer’s goods/services: make sure the customer owns the goods involved,

• Whatever you can think of that ensures a trading relationship continues, without increased bad debt.  

If you are the debtor, you should offer the above options to your creditor as a solution – you may be surprised how easy it is to get one of them accepted.  

So, as you can see, there are many ways to resolve debts, profitably, if you act early with a reasonable solution. But you have to be willing to ‘do what it takes’ to get over the present debt situation into an ongoing customer/supplier relationship: which you should want. 

The opportunity to resolve any debt diminishes by time and a lack of contact to a degree where the customer is only reminded of the debt when the supplier sends an arrears letter, or someone rings the customer once a month to find out if they can now pay. You must get ‘up close and personal’. You have to pry into the debtor’s financial situation to fully understand what is a realistic settlement of your debt. The cases that do end up in court, with the creditor and debtor both appearing usually agree on a reduced amount or, more likely, payment arrangements once the debtor has laid out their personal/company income and expenditure: of course a legal bill has to be paid.   

When you do have to use an outside service: solicitor or debt agency, be sure to have used one of the above options – even if only as a final gesture so that you can tell the court that you were willing to compromise with the amount and timing of the debt. If you do not want to, or cannot, contact the debtor, send a letter with your offer to the last address you have. By doing all you can before using outside services you will ensure that the services you employ will have to earn their money. You may find that the outside services can no longer collect your debts, as you do not give them any ‘easy’ cases to collect from. You may discover that your whole outside service budget is being used to collect ‘easy’ debts.   

Finally, if you do not already, work closely with outside services. Get them to give you short assessments of each debt case – unless the amounts are not viable. Get them to estimate costs and likely outcome. Get them to give you a favourable reason to take the debtor to court. Set cost limits on each debt case, with your authorization to continue beyond the set amount: again, get reasons to continue at that stage. Always be in control.   

         The main points:  

• 60 days overdue should be considered as debt recovery,  

• Up to 60 days, your contact with the debtor must be frequent and effective,  

• At 60 days look for the profitable solution,  

• Creditor or debtor can initiate profitable solutions,  

• Make it your business to know the debtor’s true financial position, 

• Do not set internal debt recovery budgets – expand and improve  your debt recovery action,  

• Set budgets for outside services: solicitor and debt agency

Also see an Overview of:

Credit Control and Credit Policy