Tip number 1: Set a strong foundation from the beginning
Effective debt collection starts by having credit policies and procedures in place. This starts with the process of granting payment terms to customers. The first step is to check the credit history of the business or person (if a sole trader) to determine if they are a suitable risk. Any court actions and defaults on the credit record are a red flag that you’re at risk of not getting paid. Effective credit policies include the criteria for providing invoice payment terms.
Credit policies and procedures also include a summary of the actions you will take at certain points in the accounts receivable process, such as when you will send reminder emails, send a letter of demand, or bring in a debt collection agency. Learn more in How to Protect Your Business with Credit Policies and Procedures.
Tip number 2: Automate accounts receivable for better debt collection
Another proactive step to improve your debt collection is automating accounts receivable. For example, you can set up many accounting software programs to fulfil tasks at certain times to follow up on unpaid invoices. For example, when an invoice is two days overdue, a reminder email is sent out. After ten days, a second reminder letter is sent by email. The research shows that reminders are effective for getting invoices paid. One study by ezyCollect, an accounts receivable software developer, found that 59 percent of overdue invoices require three or more follow-ups before they’re settled. The research based on 213,000 invoices found that:
- 21 percent of invoices are paid after the first follow up
- 20 percent are paid after a second reminder
- 32 percent are paid after the third reminder
- 13 percent are paid on the fourth reminder
- 10 percent are paid on the fifth reminder
- 3 percent are paid on the sixth reminder.
So once the invoice goes beyond the typical 30 days, it’s essential to follow up to get the amount owed to you. This can include making phone calls if there is no response to the initial emails sent out.
Tip number 3: Use a debt collection agency when invoices are not paid
If the client is not paying an invoice even after your reminders, you can get a debt collector to help you get paid. Debt collection agencies specialise in this task, so they know how to help business owners get paid. They will follow up with debtors by phone and email using a set of procedures. This includes sending demand letters and following up with phone calls. If the debtor doesn’t have funds to pay the debt in full, the debt collector might negotiate with the debtor and set up a payment plan so the debt gets paid over time.
The main shortcoming of this option is the cost of debt collection services. Most debt collection agencies charge a commission when they collect the outstanding debt. These debt collection fees are usually on a sliding scale, with a larger percentage for smaller amounts. These debt collector fees can range from 10 per cent for large debts (over $50,000) to 35 per cent for small debts (under $1,000). This is because it can take a similar amount of time to collect a small debt as it takes to collect a large one. One way to avoid these costs is to mention that the debtor is responsible to pay the collection fees that have been added to their outstanding debt.
Tip number 4: Take legal action if all else fails
Another option for collecting debts after other efforts have failed is taking legal action. This can be with or without getting legal advice, although getting professional advice is recommended. Small claims tribunals operate throughout Australia, but vary according to the state. In Victoria, for example, the Magistrates’ Court can hear civil disputes up to the value of $100,000.
Before taking legal action, consider the costs involved. Filing and legal fees can add up quickly, so it might not be worth pursuing this as part of the recovery process. To learn more, see When to Go to Court Over a Dispute.
Tip number 5: Use Moula Pay
There’s a way to completely avoid collection challenges and bad debt.
Moula Pay was created to help businesses overcome the shortcomings of offering invoice payment terms and creates a win-win situation for buyers and sellers.
Moula Pay is a smarter way to offer your business customers payment terms. When your customers pay with Moula Pay, you get paid upfront. Your customers enjoy up to 12 months to pay, with the first 3 months interest and repayment-free.
Become a Merchant today to:
- Get paid upfront: Give your customers great payment terms that improve your cash flow
- Stop chasing payment: Outsource the pain of chasing receivables, and let Moula take the risk of unpaid invoices
- Sell more, more often: Providing your customers with access to more funds means they can spend more with you.
Learn more about how Moula Pay can give your customers great payment terms and eliminate the need to chase overdue invoices.