Debt collection is a delicate exercise, since it involves striking a balance between the creditor’s need to obtain payment of its invoices, in order to guarantee its financial stability, and the need to maintain good commercial relations with its customers.
Indeed, debt collection is both a strategy and a procedure that has a direct impact on customer risk management, and consequently on incoming cash flow. Good control of working capital and WCR is essential to the long-term future of a company’s business. So if you’re wondering how to achieve good debt collection, there are a number of good practices you can adopt. Here are our tips for effective debt collection.
Establish a clear collection policy
When it comes to debt collection, the first thing to do is to draw up a clear and precise collection policy. A debt collection policy is a document that sets out the rules, conditions and actions to be taken to implement a company’s debt collection strategy.
For example, the collection policy specifies payment conditions such as the payment terms granted to the debtor (your customer) or the authorised means of payment, depending on the customer’s profile. In this way, sales staff can adapt the contractual conditions after checking the customer’s creditworthiness and payment habits. What’s more, the conditions may be different for a new customer than for a loyal customer who respects the payment terms.
The collection policy must also stipulate that all contractual documents clearly and precisely state the payment deadlines and late payment penalties for the debtor in the event of unpaid invoices. This information must appear in the contract, on the quotation and on the invoice. The customer must not be able to ignore these elements and must be able to read them very easily. This avoids any misunderstandings that could lead to late payment.
Finally, although the collection policy is primarily a document for internal use, it can be very useful to draw up a version for your customers. Being proactive in communicating the collections policy to your customers is an excellent way of demonstrating transparency while clearly setting out the applicable rules.
Regularly monitor unpaid invoices
Next, if you want to know how to collect debts properly, you need to carry out regular monitoring so that unpaid invoices can be recovered as quickly as possible.
The collection process put in place by the company must therefore include regular monitoring of unpaid invoices. This involves setting up a system for monitoring overdue invoices, which can be manual or automatic. Using debt collection software that is compatible with your invoicing software enables you to automatically detect invoices that have reached their due date and identify the files on which you need to take action.
For example, Cash On Time is a complete solution, published by DIMO Software, which structures the management of receivables from the automation of collection processing to debt recovery. Credit management, collection, litigation and lettering solutions are at the heart of this collection software.
DISCOVER OUR COLLECTION SOFTWARE
The sooner you identify overdue invoices, the more quickly you can collect them and reduce payment times. To do this, you need to send payment reminders to the customers concerned. Once again, if you send reminders by post or e-mail, you can do this manually or have it automated in your debt collection software. A reminder letter is then sent systematically as soon as the invoice is identified as overdue and unpaid.
Communicating professionally and persuasively
Good debt collection also involves good communication with your customer. As a creditor, but also as a supplier or service provider to the debtor (your customer), you need to adopt a cordial but firm approach when dealing with your customers.
It is therefore important to remain factual by summarising the various elements:
- the signed contract ;
- delivery of goods and services;
- sending the invoice on a specific date with a reminder of the payment deadline.
You should also clearly explain the consequences of non-payment to your customer. These include late payment penalties and possible legal collection proceedings, as well as blocking the customer’s account to prevent them from placing any further orders with your company.
These exchanges are an opportunity to find an amicable solution, a solution that avoids the need to set up legal proceedings and allows you to maintain a good relationship with your customers, by exploring the various possible settlement solutions. In most cases, this will involve staggering payments or granting additional payment time.
Use legal measures where necessary
Finally, to answer the question of how to collect debts properly, it is essential to have a good knowledge of the laws and regulations in force relating to debt collection. The Code of Civil Procedure lays down a number of rules in this area, and in particular the time limits to be observed, starting with the limitation period.
You must also be able to take legal action when necessary. In practice, after sending a reminder letter, the amicable debt collection procedure is not always enough to obtain payment from your customer. It is then necessary to turn to another procedure for collecting unpaid debts, i.e. enforced collection.
For a claim of less than €4,000, you can apply for an injunction to pay, while for a claim of more than €4,000, you should apply for a summons to pay.
It is advisable to call on the services of a legal professional if the dispute has to be taken to court.
In all cases, it is essential to follow the legal procedures in place to recover unpaid debts from the debtor. For example, once a court decision has been handed down, regular meetings should be held with the court commissioner (formerly a bailiff) responsible for enforcing the decision, to monitor repayment of the debt.
Good debt collection ensures a stable cash flow, maximises the chances of recovering unpaid debts and strengthens the relationship of trust with customers by adopting a professional approach. To achieve this, you need to :
- establish a clear collection policy;
- Regular monitoring of unpaid invoices;
- communicate professionally and persuasively ;
- take legal action where necessary.
Find out more about our debt collection software.
