Good control of a company’s working capital and WCR is essential to its long-term survival. To achieve this, you need good cash management. This involves regular monitoring of trade receivables, particularly unpaid debts. This is where the collection procedure comes into play.
There are two main types of debt collection. Amicable debt collection on the one hand, and judicial debt collection on the other. Each has its own characteristics and advantages. What are the characteristics of the different types of debt collection? How do you choose the right type of debt recovery? We explain everything.
Amicable debt collection
The first debt collection procedure is amicable debt collection. This type of debt collection includes all actions taken by the creditor to obtain payment of the invoice by the debtor once the contractual payment deadline has passed, without involving the courts.
Amicable debt collection therefore applies:
- telephone reminders ;
- dunning letters ;
- negotiations with the debtor to grant a new payment period or set up a payment schedule, including mediation;
- payment reminders ;
- formal notice.
Would you like to send a dunning letter to your creditor? Download our dunning letter template, fill in the essential information and send your letter.
So there are many different techniques for amicable debt collection. And contrary to what you might think, a formal notice is an amicable collection procedure, not a forced one. At this stage, the debtor still has the opportunity to reach an agreement with the creditor. The debtor has 15 days in which to pay the debt or propose a coherent solution for repayment of the debt. However, once the formal notice has been sent, interest and late payment penalties start to be calculated.
This is the last stage before the case is submitted to the court.
Amicable debt collection is a very important type of debt collection because it offers many advantages.
Firstly, it allows you to maintain a good commercial relationship with the debtor. Even if you adopt a firm tone, the fact that you are proactive and open to discussion means that, more often than not, a simple and rapid solution can be found to recover unpaid debts. This will be appreciated by your customer, who will find it easier to continue working with you than if you immediately launch legal proceedings.
On the other hand, using amicable debt collection, and in particular sending reminder letters by post or e-mail, is a practice appreciated by judges if you were to take legal action. This demonstrates the good faith of the company and its willingness to find a compromise before taking the matter to court. Putting these actions in writing makes it easier to prove the steps taken.
Lastly, amicable debt collection is a low-cost method. In fact, it requires the teams responsible for collection to carry out a number of actions, but apart from the cost of any registered letter, there are no costs involved. And the work of collection staff can be made easier by the use of collection software.
Automate the sending of your reminders with debt collection software.
Judicial collection
When it comes to debt collection, judicial or contentious debt collection involves taking legal action to obtain payment of the unpaid debt from the debtor.
There are various legal collection procedures, such as :
- injunction to pay ;
- the simplified debt collection procedure carried out by a judicial commissioner (formerly a bailiff);
- provisional injunction ;
- the payment summons.
Generally speaking, judicial debt collection enables the creditor to obtain a judgement, i.e. a writ of execution against the debtor. The creditor can then request enforcement of the decision, and therefore ask for compulsory execution to be carried out in order to recover unpaid debts. In most cases, enforcement takes the form of seizures.
Judicial debt collection is therefore a type of debt collection that allows you to have your debt recognised by a court judgment and to take binding action to obtain payment from the debtor. This increases the chances of recovering the debt. In this case, the debtor must pay not only the debt but also the interest and penalties for late payment, which continue to accrue until the debt is paid in full.
Debt collection by assignment
In addition to amicable debt collection and legal debt collection, there is another type of debt collection: collection by assignment of receivables.
This can take two forms:
- or the company assigns its receivables to a company specialising in factoring as soon as the contract is signed with its customer;
- or the company assigns its debt to a company that specialises in debt collection along with other unpaid debts.
In both cases, the principle remains the same: the company assigns its debt to a third party, who then bears the risk of non-payment by the debtor.
The company, which is initially the creditor, therefore obtains payment of its debt without delay, and does not have to deal with collection procedures, if necessary.
Collection by assignment of receivables does, however, involve a certain cost. In most cases, the company acquiring the receivables takes a commission on the sums assumed or on the sums recovered.
Debt collection through a debt collection agency
Finally, there is a last type of debt collection, which is collection through a debt collection agency.
In this case, whether it is an amicable or legal collection action, the collection agency is mandated to collect the debt. This means that it acts in the name and on behalf of the creditor company. It represents the company.
The debt collection agency can send out reminders, set up and monitor a repayment plan in instalments, send a letter of formal notice or send the file to a court commissioner (also known as a bailiff) to issue an injunction to pay.
The advantage for the company is that it frees up its employees’ time by entrusting the collection procedure to a third party. This means that a number of tasks can be outsourced. What’s more, the company benefits from the collection agency’s expertise, particularly in negotiation, which optimises collection. In return, however, the collection agency charges a commission on the sums recovered. The company also loses control of the collection process, and therefore management of the relationship with its customer.
Conclusion
Each situation has its own collection procedure. Thanks to the different types of collection, you can maximise your chances of recovery depending on the amount of the debt, the debtor’s situation or your desire to maintain the commercial relationship with him. Whichever option you choose, putting in place an effective debt collection procedure is essential for optimising your company’s cash flow management.
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