Debt collection or recovery – often than not is a grim reality for most businesses that are unavoidable.

When customers ultimately, are unable to pay for their purchases, the impact of those mis-opportunities can be significant. This is especially critical for small businesses when failure to collect outstanding accounts receivables can be detrimental.

Traditionally, many of such companies would employ a string of methods involving collection of past due invoices which can escalate from phone calls, emails, letter to site visits. Not only is this time-consuming but also costly. Nevertheless, the endgame is time efficiency and effectiveness. The bottom line for any business is always in the ease of transactions.

When it comes to staying ahead of bad debt, what strategies should you apply to ensure that outstanding debt is recovered in the most time- and cost-effective way? This article discusses some of the best practices for business debt collections, how they function and work for you.

How Debt Collection Works – Usual Process

For most companies, it is the accounts receivable department’s responsibility to manage debt collection. While the debt recovery process may vary from country to country, it typically goes as follows:

1. Before any action is taken, it is best to confirm that the customer was in fact, issued an invoice.
2. Next, the customer is contacted via automated phone call or email and reminded that their account is past due. They are asked to pay immediately, or risk incurring late payment penalties or interest.
3. If the customer does not respond within 24-72 hours, a staff member may follow up by phone.
4. At the same time, a letter is sent by mail.

This process may be repeated several times, depending on the company’s grace period. The average collection period for accounts receivable is 30 days, and payments that are considered severely delinquent when they due over 90 days. When the payment hits the 120^th day mark or is deemed uncollectable, the account may be sent to a third-party collection agency (or debt collector). But what debt collection agencies can do to recover a debt that is severely delinquent – may be limited.

How to Prioritise Business Debt Collections with Data

Most companies prioritise collections based on which debtors owe the most, and which ones are the most delinquent. For example, if one customer owes $10,000 and is 6 months past due, they would be prioritised over another customer who owes $5,000 and is 3 months past due. The rationale behind this approach is that the more money you can recover at once, the sooner you can use that working capital. While in theory, this approach sounds reasonable, it does come with a certain level of risk.

One reason why this method is risky is because the longer an account remains delinquent, the less likely the account holder would pay their debt. Additionally, prioritising collections without factoring in vital customer data, such as business credit scores, trade payment history, and financial statements, can be dangerous. A data-driven, predictive collections prioritisation model informs collections staff which accounts are the most or least likely to pay. This model prevents your company from wasting precious time and resources trying to collect money you may never receive.

Prioritisation vs Risk-based Methods

To illustrate the immediate edge of a traditional prioritisation method versus a risked-based method, imagine your team is focused on recovering the above-mentioned $10,000 debt, while unbeknownst to them, the account holder for the $5,000 debt is at high risk of going out of business. If the team was able to receive alerts notifying them when customers exhibit alarming payment behaviours or when one signals potential risk of bankruptcy or insolvency, they could quickly pivot their collection efforts. In this case, it would be logical to move the $5,000 account to the top of the collections list to better your chance at successful recovery.

Regardless of the type of recovery methods you currently use, a data-driven, risk-based approach will help you better predict write-off levels and insulate your business from defaults.

When to Outsource to a Collections Agency or Company

Debt collection services can be a costly option, and for that reason, they are typically used as a last resort. Debt collection agency rates will vary, ranging between 25% to 40% of the collected amount. In spite of this, these agencies provide a necessary service for companies to avoid squandering their resources chasing after customers who are obviously not able or unwilling to pay their debt. This allows your staff to concentrate on core business activities by outsourcing collections to an agency. It can be a positive sum game (win-win situation) for your business when you outsource the debts that are unlikely to be paid to an agency – after all, any returns on those amounts will always be a pleasant surprise.

While agencies may differ in their modus operandi, they can always rely on industry-specific leverage to boost collection rates. For instance, Singapore Commercial Credit Bureau (SCCB) hinge on bureaucratic capabilities to encourage payment from defaulters to avoid being penalised in our business and consumer records.

SCCB is the preferred collection agency for both corporate and consumer debt collections in Singapore due to its added affiliation with Credit Bureau Singapore (CBS).

Contact us to find out about how our suite of services can help you minimise and recover bad debts.