Debt Collection Buying Guide

Overview | How It Works | Advantages | Disadvantages | Things to Watch

How it works

The range of services is broad. Depending on your needs, you can choose to:

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.