If you regularly experience problem accounts then it is worth extending your collection schedule to dictate how you will react to specific amounts of money remaining outstanding for certain amounts of time. For example, £100 overdue by 30 days – warning letter with threat of legal action; £1,000 overdue by 30 days – passed to collection agency and then chased up solicitor after another 30 days if debt is still outstanding.

Many firms opt for a stern, standard letter from their solicitors to turn up the heat. There are plenty of legal template letters online for firms to look through. Do a search in Google for ‘credit management’ to find examples.

Other companies also warn that they will be charging interest on overdue bills at X% – a perfectly reasonable and legal option that can be included in your terms of trade. Current legislation allows companies to charge interest on overdue accounts at 8% over and above the Bank of England base rate. The problem here is that, while you are making it clear that you will not stand for this type of behaviour, you are actually extending the debt.

Collection agencies

Another popular method is to farm out some of your most difficult accounts to collection agencies. Justin Mills, finance manager at Surrey-based PC-repairer Odyssey Technologies, takes that tack with his company’s accounts. The agency he uses collects debts on a ‘no collection – no fee’ commission basis and takes the pressure of numbers off his own debt collection schedule. Commission varies from agency to agency but usually ranges between 5%-15%, depending on the type of debt being collected. The later the debt is transferred to the agent the more they will usually charge. Mills admits that he hates debt collection but sees it as a crucial part of running the business, keeping the amount that he has to deal with under control.

Going to court to ensure payment is one option that Mills does not advocate. It can take months and you are still not guaranteed to receive the money. “In my experience, it’s a waste of time. Getting a judgement does not mean anything. You’ve still got to get paid.” That type of thinking is backed up by several in the credit management business, most of whom stress that there is no need to reach that stage with the vast majority of customers, particularly if some of the earlier advice has been followed.
Whatever your approach to credit management the key point is to do something about it. Too many small firms ignore the issue until it is too late, seriously impacting cash flow and making the recovery of debts that much harder.