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Knowing when to outsource your debt collections

Is it time to outsource your debt collection? Growing debt levels, rising bankruptcy rates and positive industry reform stemming from revised debt collection guidelines issued last year have led many Australian businesses to seek professional help in recovering their customer debts.

If you’ve never outsourced your business’ debt collections before, it can be daunting knowing when to hand over the reins. How long should you attempt to recover customer debts on your own? At what point do you seek professional help? Do you turn to a collections agency or skip straight to legal proceedings?

Here are effective ways of mitigating customer debts, plus some considerations for escalating debts to professional collectors.

It all starts with good internal processes

Prevention is always better than cure. Keeping your customer accounts in good shape can save significant financial strain of accounts becoming overdue. There are a number of ways businesses can manage customer credit effectively:

  • Set enforceable credit terms tailored to you and your customers
    When setting credit terms for customers, it’s important to choose lengths of terms and credit limits supporting your business cash flow. Make sure they’re realistic and reasonable for your customers.
  • Communicate clearly about credit
    What’s the point of having credit terms if your customers don’t know about them? It’s important to clearly articulate your credit terms at multiple touch points with your customers, including before purchases have been made. If accounts do become overdue, be sure to make prompt contact with your customers. To adhere to new debt collection guidelines, you must also keep accurate records of all contact you make with your debtors.
  • Performing customer credit checks
    Australia’s Comprehensive Credit Reporting (CCR) laws make it easier for businesses to build credible credit profiles for their customers.

To ensure customers have the capacity to repay any credit that is issued to them and to avoid becoming liable for outstanding debt, businesses must conduct regular and rigorous credit checks. If your business regularly extends credit to customers but does not have the capacity to perform credit checks, you may consider outsourcing this vital function or signing up to services like CreditorWatch.

Knowing when your customer debts are out of hand

As a general rule, if you’ve chased payment three times or more, or if a customer is refusing to make payment, it’s probably time to enlist professional help.

Regardless of the size of the debt or how long you’ve been chasing payment, it can feel like a big step to hand over the management of your clients’ overdue accounts. Seeking professional help to recover customer debts is a positive step for your business. It helps put customer finances back in the black and allows you to focus on running your business.

Knowing how to effectively recover your debts and doing so in a way that reduces any further liability to your business is imperative for your reputation and business viability. The value professional collectors bring to the debt collection process is up-to-date knowledge of best practice and appropriate conduct, not to mention significant experience in successfully engaging with debtors.

Other benefits of using an external collector include the likelihood of resolving debts much faster and distancing your business from negative interactions that may become necessary with clients.

Debt collector or lawyer?

Many businesses deliberate over whether to use a lawyer or a collections agency for their debt collection. While lawyers bring extensive legal expertise, they tend to be more expensive, charging an hourly fee as well as a percentage of the recovered amount. If legal proceedings take place, additional legal and court-related fees may also apply.

Although generally more affordable than lawyers, collection agency fees can vary along with their rates of success. To ensure professional handling of your customer accounts, use a collections agency accredited with the Institute of Mercantile Agents, the Australian Institute of Credit Management and ACA International.

To avoid incurring additional costs without successfully recovering your customer debts, businesses are advised to engage collectors with reasonable fees, providing a ‘no collection, no fee’ service.

Collecting your debts while preserving your brand

According to new collection guidelines defining acceptable debt collection conduct in Australia, creditors will generally be liable for their debt collector’s conduct. The collection agency you choose to work with is as important as your decision to seek outside help.

In an industry with mixed reputations for conduct, it’s important to choose a reputable collector that will not only recover your debts but also operate professionally and deal with your customers in a way that preserves your brand and valuable relationships.