How It Works

The range of services is broad. Depending on your needs, you can choose to:

• submit individual invoices for collection
  
• transfer the management of part of your sales ledger
  
• transfer the management of all of your sales ledger to a collection agency

Another useful service that some of the agencies may offer is the tracing and enquiry service for the debtors that have seemingly “disappeared” and also provide legal services should your debts ever need to be recovered in court. With most small businesses, the likelihood of them having less sophisticated accounting systems is quite high, and therefore it can make more sense to consider transferring all, or part of your sales ledger to a collection agency, as this will free up more of your time and you will probably find money being paid quicker.

Debt recovery or collection tends to work like this: A combination of letters and faxes on the agency’s letterhead are sent and also telephone calls will be made to the debtor. Due to the fact that each debt is invariably different, there is no fixed procedure, although many companies find telephone collection tends to be most effective. With every attempt to recover the debt made, the efforts become escalated and in the last instance the agency will recommend to the debtor immediate payment, or face legal costs if further action should need to be taken. Of course, going to court is really the last resort, and it will depend on the size of the claim and the situation you find yourself in.

The majority of your overdue accounts will be collected anywhere from within 24 hours to a few weeks. For those debts where the collection does not succeed, and where the amount is large enough, legal action is started within 6 to 8 weeks. This step is only taken after your consent.

You may now be saying this is a great idea, but exactly how much does all of this cost you. Most collection agencies operate under a “no collection – no fee” policy, which means if they don’t get the money owed, you will not incur any charges for their efforts. The commission charge can depend on many things including the amount you have placed for collection and whether the accounts are in the UK or overseas. Most people find that the older the debt is, it becomes increasingly more difficult to collect, and therefore the collection fee also rises. Foreign collections are significantly more expensive than UK collections.

Rule of thumb: calculate with a 4% to 8% fee for the recovered debt (note: it can be more, it can be less...). Foreign debt collections are 2 to 3 times as much. Some companies ask for upfront placement fees with the submission of your invoice. Many also have minimum charges for each collected invoice. The solicitor, when required, costs extra (normally £50 to £100 per invoice upon instruction to proceed).

Discounted prices are common for regular users of a particular agency. The collection agency pays you the amount collected and then invoice you for their collection costs. Most companies offer better deals the more you use them, so you may find that over the years of using an agency, the costs will drop, because you are providing them with regular business.

You may also like to think about Credit Insurance, because this can help to reduce the risk of losing cash through bad debts. It provides your business with protection against the failure of your customers to settle and pay their debt. You agree on a credit limit for each of your customers, and if the customer does not pay within an agreed timeframe (normally 90 days) then you will receive 80 – 95% of the invoice amount from the credit insurance company. Generally, this type of insurance costs between 0.3% and 0.7% of your turnover, and you need to decide whether this cost is acceptable to your business.

Online capabilities are increasingly common. Many collection agencies allow you to request individual invoice debt collection online. The placement forms are simple, containing the key data of the invoice you want to have collected, and contact details of the debtor (if you have them). If you opt to have an ongoing partnership with a collection agency you are typically provided with Internet access to your account, allowing you to constantly monitor your sales ledger and individual customer details.

Thursday, August 28, 2008