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5 Most Effective Debt Recovery Strategies and the Process Involved

Effective debt collection strategies are all about the skills and methods that are employed in order to collect your customers’ outstanding invoices more effectively and get your customers to pay up what they owe you and on time too.

It however goes beyond this. Effective debt collection also involves recognizing customers who have cash flow problems quickly, and to effectively deal with those customers so that you can effectively limit the loss you would have incurred.

The importance of an effective debt recovery system to a business cannot be overemphasized because it is only when the outstanding debts that are owed to a business are redeemed that the cash flow can improve or return to normal.

However, when an inappropriate debt recovery strategy is employed by a business, it could result in the business owner wasting his time unnecessarily chasing outstanding debts and thus inadvertently reducing his focus on his business.

Recovering debt is never an easy process yet it is a very important ingredient for a successful business as it will help you to keep the amount of overdue payments to the barest minimum.

A business that is being owed a lot of debt by its clients and customers is starved of funds, thus drastically reducing the profits that would have been made and ultimately stunting the growth of the business.

Here are a few tips to follow in order to limit the debt that will be owed to your business and to also ensure that if the debt occurs you can easily get your due.

1. Get any agreement you have with any party in writing including all payment terms

Have the details of the services you provide in writing along with terms of delivery including any exclusions (those things that you are not providing).

Also, you should include in writing the right to recover legal fees and collection costs in the event you have to commence collection efforts. Never enter into a business deal based on trust or over a handshake.

Make sure that the other party duly acknowledges and signs all invoice so that in the case of any form of default on their part, you will always have a legal backing.

2. Secure the debt

You need to make sure that you have the opportunity under the law to secure the debt with lien or bonds rights, guaranties or a UCC1. That is you should do everything that is within the confines of the law to ensure that you will be paid.

3. Bill regularly

As obvious as this may sound, there are some people who do not send bills regularly to customers especially regular customers. Always send bills to customers immediately the transaction takes place and never allow bills to pile up.

4. Limit your exposure

You can limit your exposure to debts by limiting the amount of credit you offer to delinquent account holders. Some people feel obligated to continue giving goods to certain customers on credit even though they are already owing them a lot of money because they feel that they may lose such customers. But in reality, a delinquent customer may not be worth keeping.

As a business owner, you should regularly review your account receivable reports so that you can determine who owes you money, how much they owe you and whether they are at a good credit risk to continue to extend credit to them.

A debt recovery strategy that is to be employed should not be personal nor should it include unjustified threats or intimidation tactics as these are contrary to the tenants of the law.

No matter how bad the debt issue has made you feel, it is expedient that you should maintain an air of professionalism irrespective of the strategy you wish to adopt in the recovery of what is duly yours.

5 Effective Debt Recovery Strategies a Business Can Employ

1. Reminders

Sending reminders on a regular basis to people who owe you debt can be a very effective recovery strategy. This is because some people who owe you may have forgotten about the outstanding payment or they may have misplaced the overdue bill you have given them before.

A telephone or a written letter can be used to remind debtors that they are yet to settle their outstanding amounts. Whenever you approach, call or write to a debtor to remind him about an outstanding debt, you should make sure that you are armed all the necessary data about that particular transaction.

The body of a sample debt reminder letter can read thus:

We are concerned that your account with us is overdue. The current balance of your account with us is ${insert amount}.

We would like to use this medium to draw your attention to the goods (or services) that was supplied to you on {insert date}. As stated in out terms of trade, all the goods your purchased were to be paid in full within {insert number of days}

If there is any difficulty with the account, we will like you to please discuss this issue with us as soon as possible. Otherwise, we shall expect payment of the above sum within the next {insert number of days} of the date of this letter.

Enclosed with this letter are copies of our invoices relating to that your account.

Yours faithfully.

2. Debt collection agency

This is a very economical and cheap method of recovering debt as compared to some other strategies on this list because of the lower overhead cost this is involved here. Debt collectors are affiliated with debt collection agencies but some work independently while some are attorneys.

Most at times, these agencies serve as middlemen who help to collect overdue debts from delinquent debtors and then remit it to their creditor. The creditor usually pays the agency a commission that can reach 25 percent to 45 percent of the total recovered debt.

The advantage of a debt collection agency over hiring a lawyer in the recovery of debt is that with a debt recovery agency, they will not be paid unless the debt is recovered, however, if you hire a lawyer, you will be obligated to pay him or her irrespective of if the debt is recovered or not.

Debt collection agencies are versatile and they collect all forms of debts like credit card debt, medical debt, automobile loan debt, personal loan debt, unpaid utility bills et al.

Some collection agencies are specialized and will only take on a certain type of debt. For instance, some debt agencies may only try to recover debts that are not less than $200 and that have not exceeded a period of two years.

Alternatively, some agencies also buy debts out rightly from the original owner of the debt. For instance, the original creditor may feel that the chances of recovering a debt are very slim or that he has no interest in trying to exert effort to get back the debt, he may sell the debt to a debt buyer.

The original creditors usually package together many debts and then sell them as a group. The older a debt is, the lower the price of purchasing it. In fact a debt buyer may spend just $50 to buy a delinquent account that has over $1,000.

Debt collectors make use of letters and phone calls in order to convince debtors to pay up on their debts. However, they are not allowed to harass people in order to get back their money. Sometimes, they may need to do additional investigative work in order to get the current whereabouts of the debtors.

3. Renegotiating debts

At times, it becomes very obvious to the creditor that a particular debtor does not have the wherewithal to pay up a debt.

At this point, the most feasible strategy to recover that debt may be to negotiate the amount of debt to be repaid and its payment plan.

4. Mediation service

Sometimes a creditor may not be able to come up with a plausible solution to the debit crisis of a debtor. In this case, he may opt to use a mediation service.

In mediation, someone or some people stand as middle man/middle men to help the two parties find a common ground that is favorable to them on the issue. Mediation is a lot quicker and less stressful when compared to a law court.

Most times, the court of law expects that you would have tried to resolve the issue through negotiation and, mediation before bringing the issue to the law court.

5. Legal proceeding

If you have contacted a debtor on several occasions to redeem his debt and he has not done so, then you may have to resort to a more drastic approach.

If you feel that you have exhausted your options or that you lack the experience or proficiency to get a debt from a particular client then you should hand the case over to an attorney.

Making use of a litigation process in order to recover debt should be seen as a last resort as it can be time and money consuming.

Also, a litigation process for debt recovery can get quite complicated if the debtor decides to defend the matter. However, this hardly ever occurs in cases where goods or services where offered on credit and then not repaid.

Before you go forward with the litigation process, it is advisable to first serve the debtor a letter of demand so as to show him or her that you are very serious. However, a letter of demand is not a compulsory prerequisite for a litigation process.

A letter of demand should have a heading that clearly states that it is a letter in terms of the Magistrates’ Courts Act and should clearly state the purpose and nature of the claim.

The letter should give the debtor a stipulated amount of time (ideally ten business days) to repay the debt. When you send the letter, you should endeavor to get an acknowledgement of receipt.

If after the demand letter has been sent and the stipulated time of payment has elapsed, a summon should be filed and delivered by the clerk of the Magistrate court. The summon usually has the particulars of the claim attached to it.

If the debtor decides to defend the summon, this would mean that you would have to slug it out in court. However, with the necessary documents to prove that you are being owed, the case shouldn’t be difficult to win.

Otherwise a default judgment will be granted. This happens in the absence of the debtor because he or she has failed to defend himself/herself in court.

Once a default judgment has been granted, it is valid for the next thirty years and it also empowers the plaintiff to use various collection methods to get back his money.

In conclusion debt collection is a necessary evil that has to be carried out in the interest of your business but you can always pass on this task to a reliable online debt collection agency if you do not feel up to undertaking the debt recovery process yourself. They will charge a commission for the service they offer and will definitely give you value for your money.

It should be noted that the fact that a customer is experiencing some difficulty in coming up with payments, does not mean that they cannot be a good customer in future.

Therefore, it is really expedient that irrespective of the debt recovery strategy you employ you should endeavor to preserve and foster goodwill between you and the customer.

When trying to collect debt, you should never ever be abusive or threaten the debtor because not only is this a very ineffective method of trying to get back fund, it can also incur hefty legal ramifications.

In addition, it should also be noted that at times, a debtor could go on the offensive and become aggressive and abusive. In this scenario, it is important that the collector be calm and professional.

Try your best to calm the debtor down and make him or her see things from your own perspective. Getting confrontational with a debtor will only serve to further hinder your efforts at debt collection.

Furthermore, you should always bear in mind that going to court should be the last resort. A litigation should only be pursued when a debtor has exhausted every other means of debt recovery.

This is because litigation is costly, time consuming and more often than not it leads to an end to whatsoever relationship that existed between the debtor and the creditor.