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Effective debt collection strategy for businesses

Effective debt collection strategy for businesses

Wednesday 13, 05 2020
Debt collection is a hard work and not everyone can undertake and accomplish it well.
Debt collection is a hard work and not everyone can undertake and accomplish it well. In order to conduct debt collection successfully, in addition to the skills and bravery that debt collectors are required to have, businesses need to have a reasonable debt collection process. The debt collection strategy consists of 7 steps as follows:

1. Determine the minimum amount 

This is the first and foremost thing businesses need to do before they embark on debt collection. Of course, it requires them to analyze their budget to find the minimum amount they need to sustain their business, which will help them to have a specific debt recovery implementation plan to measure the performance.

2. Classification of debtors 

There are many types of debtors Business owners should divide debtors into two groups: important and less important debtors. To be more specific, less important debtors are those with whom businesses can terminate cooperation. They will try not to offend the important debtors, but they can be tough on the other ones. Planning debt classification helps businesses to prepare documents and coping skills for each specific group. 

3. Choose a debt collector

Should the manager or the staff conduct debt collection? This question seems to have many conflicting answers. Not everyone has the skill needed, so business owners must choose the most suitable one to meet the debtors. That person may be in the accounting department or an employee with the best relationship with the debtor. However, in reality, businesses should choose companies that provide professional debt collection services to ensure the highest efficiency.

4. Remind debtors to pay before the debt is due

About 10 days before the debt is due, creditors should remind their debtors to prepare the money. Sending an email is a good option. For some special debtors, scheduling an appointment to talk about the debt is highly recommended. During the conversation, creditors should not be harsh or impatient. If they do so, the likelihood of debtors making payment will be higher. If they say they have some problems, ask for another face-to-face meeting to find out the cause and severity of the situation. Otherwise measures to recover the debt should be taken seriously.

5. Negotiate with debtors

This is the most important step in the debt recovery process that requires a lot of skills to successfully recover the debt. Try to avoid costly legal debt recovery which may not help maintain good relationships with debtors.
Negotiation is very important, requiring the collector to be skillful in communication and to pay attention to the attitude of the debtors. An effective formula in the negotiation process that creditors can refer to:

       •   Develop a repayment plan for debtors

The possibility that the debt is collected will be greater if creditors accept installments. The 5% interest rate for the remaining amount of debt is acceptable to the debtor. In addition, business owners should discuss future purchases. They should say that they will not make any transactions until the debt is paid off, or only if the debtor pays cash immediately.

       •   Accept payment by goods

In some other cases, you can let partners pay with their goods and then sell them to get money. This can save money and increase the flow of capital. Of course, you should only accept items that are easy to sell and that the value of the goods must be slightly larger than the debt. By being easy to your debtors, you will earn their gratitude. As the business situation of debtors progresses, they will stick with you more. This is also considered an effective way to collect debts.

6. Legal debt collection

Lawsuit is an option that not many businesses have taken into account, but once businesses "encounter" debtors that are irresponsible or pay slowly, the court is the most effective way to recover debts. 

However, this is considered a last resort when all other methods of debt collection are ineffective, because it is very time-consuming (sometimes a whole year), and expensive (the cost of hiring a lawyer, preparing the lawsuit). In addition, lawsuits are only really effective when the contract clearly states that if the debtor breaches, they will be subject to legal sanctions (such as retrospective property recovery).

7. Being cautious right from the start is the best way to limit debts

Debt normally accounts for about 20-30% of total assets of the business. Bad debts often put the working capital of enterprises in deadlock and risk, so every business wants to control and minimize debt. Therefore, be careful right from the stage of sale. Most of the bad debts come from selling policies. In particular, providing conditions for debt, especially for extending payment time, seems even more attractive than offering cheap prices, with which the risk of overdue debt and non-payment debt increased.

The best way to limit the risk of debt is to be more careful in setting standards and terms of sale on credit. Standard of selling on credit should be based on the level of capital, debt repayment capacity, reputation, credit information of debtors in the past... In a nutshell, the most effective way to collect debts is to limit the occurrence of bad debts.

The above-mentioned debt collection strategy makes it easier for debt collectors to perform their job. Depending on the type of debtors, businesses can analyze the situation of their debtors and flexibly apply this plan.

>> Debt collection: a thorough understanding
Alice Hoang Thao - VietnamCred

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