Letter Collection Procedure and Examples

Last Updated
August 19, 2010

Collection by letter is accepted as a cost efficient/effective method of recovering any amount of money, and in particular small value, high volume accounts.

The letter has a large part to play in the recovery of credit sales. A very mild letter can be a gentle, tentative reminder for that possible oversight: a ‘Formal Notice of Default’ can be (usually is) a final, and unmistakable demand for immediate payment or else!

The debate about whether a telephone call is more effective than an arrears letter is less of an issue if you send out a quality arrears letter. Quality means:

  • the correct trading name
  • the correct payment address
  • your reference/their reference
  • clear identification of the due invoice
  • clear identification of the overdue amount
  • clear instruction for payment
  • quality paper and envelope
  • business reply envelope

Don’t Forget…

Ensure the arrears letter is sent to the person in the customers company who has the responsibility to deal with your letter: When you set up your customers details on your system, make sure that the details you use are those that will get an arrears letter to, say, the Accounts Dept. (Northern Area), Floor 4, Queens House…too often, arrears letters turn up on the desk of the person in the customers company who was responsible for ordering the goods/service from you, as such, this person usually has no responsibility for payments (you can guess where your letter might end up!), further, the accounts department and the buying department could be hundreds of miles apart! An arrears letter must be formal: no sales messages on the letter and no sales inserts in the envelope, or opening a letter with ‘Dear John…’ (unless you use ‘Dear John’ as a tactic) Write in plain English: an arrears letter from a solicitor, inevitably, has legal jargon, which is accepted by most in business however, legal jargon from any other source (i.e. you) will reduce the effectiveness of the letter sometimes, it is acceptable to be a little vague in your letter as to what action you will take if the customer does not pay (sometimes you need to keep your options open) Say what you will do: then do what you say: if you say you will send the account to your solicitor in 7 days… or, you will take court action… or further deliveries will be put ‘on stop’ you must do it if your customer has not paid by the deadline in your last letter, it is unlikely that they will pay after the deadline, so why wait another 2, 4, 6 weeks, act now, your customer either has no money or is not impressed by your collection activity! Letters are sent (usually) by three methods: 1) Manual Selection 2) Full Automation 3) Auto-manual 1) Manual Selection is to manually review your ‘debtor report’, ‘aged arrears analysis’, or whatever listing you use, and specify which accounts will get what letters. The benefit of this system is that of control. In theory, you should never send an arrears letter to anyone other than those you choose. You can also look further into those accounts that show an arrears situation (that do not usually) and check them before deciding upon an action. The main problem (as ever) is time. Credit control by manual selection of letter needs consistency and discipline.
If you sent a first arrears letter to a debtor three weeks after an invoice was due that stated, “we have noticed that your account remains unpaid…” this would be the wrong letter for an account that is much overdue. However, (again after three weeks) you send your first letter stating, “your account is seriously overdue and we demand payment…” this could (easily) be a problem if the customer had a genuine reason for the delay. You must send the correct letter to match the overdue account circumstances, such as: a reminder at an early stage: a more formal letter say, 7 days after the reminder: then a demand say, 7-14 days after the formal letter. If you do not have the time, resources , etc. to maintain a timely manual letter policy you should resort to a degree of automation.
Sending out an arrears letter immediately the account becomes overdue can be a waste of resource. A large number of customers will normally pay between 1 – 4 days after the credit period allowed. A large number of companies (mainly middle/large size companies) will insist on paying you at the end of the month following the due date of the invoice (the dreaded ‘cheque run’). My advice is to put up with it; you will not be able to change their paying habits. 2) Fully automated letter systems will produce an arrears letter within 1-7 days of the account becoming overdue. The system will then send out further arrears letters at pre-determined intervals. The system may have three or four different levels of letter:

1. First Reminder

2. Second Reminder

3. Final Demand

4. Letter Before Action

If at some stage an overdue account is identified as a query, for credit etc. the account is ‘flagged’ so that further arrears letters will not be sent. If payment has not been received after the final arrears letter has been sent the account will be ‘flagged’ as say, ‘legal’. The downfall of the fully automated system is that after a while everyone knows that four letters will be sent before serious default action will be taken. This is not such a problem with most creditor/ debtor relationships as you can choose not to provide further credit. However, if you continue to trade with a debtor who is always late, you need to send out a more meaningful letter than a First Reminder each time that they default. 3) Auto-manual is a compromise system that you can design to your needs. You can choose to send out mild arrears letters to every overdue account. Some customers will be a little put out, however, in the main, if a customer receives a mild reminder letter just after the account becomes overdue (whether they have paid or not), no damage is usually done. By reviewing a debtor list after the First Reminder stage, you can choose to select a number of accounts that would be better served by being telephoned, then send the remainder the next letter.
The point of ‘auto-manual’ is to ensure that non-experienced staff (as an example) can administer most of your letter system. Go to Debt Collection

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