Debt collection is an integral part of a company’s financial management. Having a good debt collection process helps to control working capital requirements (WCR) by ensuring that incoming cash flows arrive on time by managing customer risk. While debt collection is generally understood, it can be more difficult to identify the different collection techniques that can be used to obtain payment for unpaid invoices. Here’s a look at some effective debt collection methods.
Steps in debt collection
What is debt collection? Debt collection is a set of methods and steps that a company must follow to obtain payment for an outstanding debt. Before looking in more detail at the different collection techniques, let’s review the stages involved in debt collection:
- identification of unpaid invoices.
- communication with the debtor (your customer).
- sending reminder letters.
- formal notice.
- take legal action if necessary.
Identifying unpaid receivables
The first stage of the collection procedure is to identify unpaid debts. It is very important to detect unpaid invoices that are overdue as soon as possible, so as to be able to react swiftly to any unpaid invoices.
This effectively reduces the time taken to pay the overdue invoice.
Communication with the debtor
Once the unpaid amount has been identified, contact should be made with the debtor, your customer.
At this stage, it is important to maintain the business relationship. In fact, the unpaid amount may be due to a simple oversight that can be quickly rectified. To do this, it is best to adopt a cordial tone while remaining firm on the need to regularise the situation in your books.
This applies whether you communicate by telephone or e-mail.
Sending reminder letters
Dunning letters can be sent by post or e-mail to the customer.
This involves formalising in writing the request to the debtor to pay the outstanding invoice. The following should be noted:
- he invoice number ;
- the date of dispatch ;
- the initial payment deadline ;
- the amount to be paid to the company.
Formal notice
A formal notice is a letter sent by the creditor to the debtor company by recorded delivery with acknowledgement of receipt. Interest and late payment penalties are calculated from the date the formal notice is sent.
This letter instructs the debtor to settle its debt with the creditor within a period generally set at 15 days. If the debtor fails to do so, the matter may be referred to a judicial commissioner (formerly known as a bailiff) or a lawyer to obtain the payment due.
Legal recourse if necessary
Finally, if the formal notice is still unsuccessful, the company can resort to compulsory collection (injunction or summons for payment).
The different recovery techniques
There are many different collection techniques. Depending on the stage of the debt collection procedure the case is at, you can use an amicable collection technique or a judicial collection technique.
The main recovery methods are :
- the use of debt collection software;
- monitoring the ageing balance ;
- the use of friendly reminder letters ;
- follow-up telephone calls ;
- e-mail communication to facilitate written follow-up;
- out-of-court debt collection ;
- judicial recovery ;
- using a debt collection agency.
Using debt collection software
Debt collection software is a highly effective tool for optimizing debt collection.
In practice, a collection tool can be used to :
- automatically detect unpaid invoices;
- send reminder letters to customers thanks to automation ;
- perform accounting lettering, if equipped with this function.
This is particularly true of the CashOnTime software, a comprehensive solution published by DIMO Software that structures receivables management from the automation of collection processing to debt recovery. Credit management, collection, litigation and lettering solutions are at the heart of this collection tool.
This saves time for the teams, who can devote their time to the most complex cases. It also makes the collection process more reliable and responsive.
Why not automate the sending of reminder letters using debt collection software?
Monitoring the ageing balance
The aged trial balance is an accounting document that provides an exhaustive overview of trade receivables due and payable, for the purpose of accurately monitoring cash flows. It can therefore be used to identify unpaid receivables. You can classify them by the number of days overdue or by the amount outstanding.
The aged trial balance is therefore a collection technique that makes it easier to identify unpaid debts and rapidly implement the necessary collection actions.
The use of friendly reminder letters
Before sending a formal letter of formal notice to your debtor, you can send a “friendly” reminder letter. The aim is to inform the debtor of the delay in payment, and to ask him to settle the amount owed as quickly as possible, in a friendly but firm manner.
It generally invites the creditor to contact you if an amicable solution needs to be found.
Sending a reminder letter is not compulsory in debt collection proceedings.
However, this type of letter is appreciated by judges in cases where the dispute has reached a legal outcome. It demonstrates the company’s good faith in finding an amicable solution with its debtor customer. It can therefore be used as evidence.
This is why many companies use this collection technique.
Follow-up telephone calls
Follow-up telephone calls are another method of debt collection. Less formal than a dunning letter, a telephone call allows you to speak directly with the debtor.
This is generally appreciated by customers, and helps them to find a solution quickly in order to settle the debt. The role of follow-up calls is to ensure that the debtor is honouring his commitments.
E-mail communication to facilitate written follow-up
Although telephone calls can be useful, they cannot be used to trace exchanges. This is why communication by e-mail is a common collection technique.
E-mail exchanges are in writing and dated. They can therefore be used as proof if necessary. They also have the advantage of being perceived as less formal than a letter, which helps to preserve the commercial relationship in the context of amicable debt collection.
Amicable debt collection
Amicable debt collection refers to all debt collection techniques that do not involve the intervention of a judge. The aim is to reach a common agreement to collect outstanding debts. It therefore includes :
- telephone reminders ;
- dunning letters ;
- formal notice.
There are also more closely supervised collection procedures such as the ad hoc mandate or conciliation.
Judicial collection
If amicable collection techniques fail, the case may be referred to a judge. The debt collection procedure varies depending on the amount in dispute:
- injunction to pay up to €4,000 ;
- summons for payment in excess of €4,000.
It is best to be accompanied by a legal professional. There are many very specific rules to follow, such as those set out in the Code of Civil Procedure.
Using a debt collection agency
There is another collection technique. This involves entrusting the collection of the unpaid debt to a debt collection agency.
The agency takes charge of the various amicable and/or legal collection procedures. In return, it receives a commission corresponding to a percentage of the amount recovered.
Negotiating repayment plans
Another collection method is the negotiation of repayment plans.
This involves setting up a debt repayment plan based on the debtor’s financial capacity. This requires mutual agreement on the payment schedule that can be applied.
It is important to formalise this payment plan in writing. This way, if the debtor fails to comply, the creditor can terminate the plan and resume amicable or legal collection proceedings.
Monitoring the payment plan requires particular care. Here again, a debt collection solution can help you keep track of the various instalments simply and efficiently.
Conclusion
A company has a whole range of effective collection methods at its disposal to ensure that its debts are paid. One of the most important collection techniques is proactive communication with debtors. Maintaining communication is essential to finding a solution quickly and under the right conditions.
In addition, using a debt collection solution optimises the entire collection process, from detecting unpaid debts and sending reminder letters to monitoring the payment plan.
Discover our debt collection solution.
