Have you heard this line before when chasing for payment of an overdue account: "It's just that the two directors need to sign the cheque, and one of them is out of town for three weeks". As unfair as it may seem, some very large businesses do not pay their bills until they have to, as it can be a cheap way to get a loan from you. Typically late payment is not because your customers are insolvent.

For many businesses outstanding invoices are their largest asset. Overdue bills are a nuisance, expensive to collect on your own and a distraction from what you and your staff should be doing. A collection agency can efficiently help recover overdue debt for you. Once a third party is involved it is often the case that debtors pay faster.

The industry is very professional and large (over £3 billion turnover representing some 17 million claims are collected annually). Various groups of collection agencies exist:

• divisions of credit insurance and accounting and law firms
  
  
• divisions within most of the large credit information services companies
  
  
• small to mid-sized independently owned companies
  
  
• and as services offered by individuals (only few of whom are responsible for the negative debt collection image)

Factoring is an alternative service, and depending on your needs, more comprehensive than debt collection (click here for Factoring). Collection agencies need to be licensed by the Office of Fair Trading and are regulated under the Consumer Credit Act 1974 (and subsequent regulations). There are also strict laws disallowing harassment and other inappropriate means to collect overdue debts.

Debt Collection - 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

Some agencies also offer a tracing and enquiry service for debtors that have "disappeared" and legal services, if and when your debts need to be recovered in court. The smaller your business is, the more likely it is that your accounting systems are less sophisticated, and the more it makes sense to consider transferring all, or part, of your sales ledger to a collection agency.

Debt Collection works as follows: A combination of letters and faxes on the agency's letterhead are sent and telephone calls are placed to the debtor. There is usually no fixed procedure since each debt is different, although telephone collection tends to be most effective. The collection effort is escalated with every attempt to collect from the debtor, in the last instance recommending to the debtor immediate payment, or face the possibility of legal costs should further action be taken. Going to court is the last resort, it depends on the size of the claim and the situation.

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.

What does it cost? Most collection agencies operate under a "no collection - no fee" policy. The commission charge depends on many things including the amount you place for collection and whether the accounts are in the UK or overseas. Generally speaking, the older a debt, the harder it is to collect, the more expensive is the collection fee. 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.

Credit insurance further reduces the risk of losing cash through bad debts. It provides your business with protection against the failure of your customers to pay their debt to you. You agree on a credit limit for each of the customers with whom you do business. If the customer does not pay within an agreed timeframe - typically within 90 days - you automatically receive 80-95% of the invoice amount from the credit insurance company. The insurance generally costs between 0.3% and 0.7% of your turnover.

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.

Debt Collection - Advantages

• Third party involvement increases the chances of collecting overdue debts. Fact.
  
  
• If you wish, sales ledger management and debt collection. The debt collection agency does both for you.

Debt Collection - Disadvantages

• Costs money: a trade off between collecting by yourself (your time) and paying a collection agency to collect for you. If you do not succeed in collecting, you and your staff have lost valuable time. A collection agency generally only gets paid if your debt is collected.
  
  
• The debt collection agency interacts with your customers. It is very important that your debt collection agency helps you build a long term customer relationship by collecting the invoices in the same courteous and diplomatic manner you would.

Debt Collection - Things to Watch out for:

• Don't shop for the best price. Make sure the collection agency is long established, financially stable and creditworthy. By transferring your collections task to an agency you are in effect extending credit to the agency. You must be certain to receive payment from them. Beware of the less reputable collection agencies. Some of their methods are unprofessional and unethical.
  
  
• Make sure the agency is a member of the Credit Services Association (CSA). These agencies have to work within specific guidelines.
  
  
• "No collection, no fee policy". You should not have to pay if your debt is not collected.
  
  
• Minimum charges and handling charges. Look out for minimum charges per invoice and handling charges that become due if you withdraw the invoice collection from the agency
  
  
• Reputation and references. The debt collection agency will be a critical interface with your customers. Make no compromises. Work with a reputable firm to eliminate all risk of negatively influencing your customer relationship. Ask for references. Check if the collection agency is a member of the Credit Services Association.
  
  
• Personalized service. Particularly if you are a small company; make sure to have a customer service team available for you.
  
  
• Exports collection capability. If you export, make sure the agency has an own network, or affiliate partners, in your customer's country to provide on the spot collection.
  
  
• Credit insurance. Most collection agencies offer insurance to protect you from bad debts.
  
  
• Chose the debt collection agency according to your customer profile. Whether your customers are other businesses or individuals is an important criteria in choosing your collection agency. Some agencies, for example, do not collect against individuals.
  
  
• Transfer restrictions on your outstanding invoices. Make sure there are no existing contractual arrangements that do not allow you to transfer your outstanding invoices to a debt collection agency. (For example, a loan that is secured by your outstanding invoices).
  
  

Debt Collection FAQs

Should I chose a debt collection agency or a solicitor? Going to court is the last resort. It depends on the situation. Generally speaking, collection agencies get paid when you receive money; solicitors get paid by the hour.

What does it cost? Rule of thumb: calculate with a 4% to 8% fee for the recovered debt (note: it can be more, it can be lessÉ). Foreign debt collections are 2 to 3 times as much. If the collection agency fails to collect you should not have to pay anything, except where a placement fee is applicable.

How high is the chance my bad debts will be paid by using a collection agency? Impossible to answer. It depends on the quality of your outstanding debts. Generally speaking, involving a third party increases your chances for collection. Make sure you only have to pay after successful collection.

How quickly will I receive the money? Ranges from within one day to a few weeks. Going to court is generally the only option if the debt is not collected between 6 to 8 weeks. You receive your money less fees immediately after collection of the debt by the collection agency

What is credit insurance, or trade indemnity? Insurance in case your customer fails to pay the invoice. You receive payments for your bad debts up to pre-determined limits.

What information is needed to collect an individual invoice? Full name and address, telephone and fax numbers of the debtor, amount outstanding, copies of invoices, statements, relevant correspondence, collection attempt history (many agencies allow you to submit this information online).

How are invoices usually collected? A combination of letters, faxes and telephone calls, the latter being the most effective.

What is factoring? A service providing you cash upon issuing invoices and sales ledger and collection services. A more complete explanation of factoring is contained under Factoring on this web site.

Debt Collection Glossary

Credit insurance. Insurance in case your customer fails to pay the invoice. You receive payments for your bad debts up to pre determined limits.

Factoring. A service providing you cash upon issuing invoices and sales ledger and collection services.

Inkasso. Means debt collection, sometimes used in the industry (for example "commercial inkasso").