Clients often ask me how they should warn debtors that have overdue accounts when they are considering sending the account to a collection agency.
It doesn’t matter how you deliver a debt collection warning letter or even if you do, there is no legal requirement for them in New Zealand. The account just has to be over the agreed payment date ( by at least one day) and you must have given them an invoice.
I have studied the effectiveness of different warning systems including the graduating letter system, 1. nice, 2. less nice, 3. firm, 4. Assertive. What works best is the following.
Have somewhere on your invoice:
All overdue accounts will attract interest and collection fees. (this sets an expectation of payment within terms from the outset and that you have an agency that you work with)
Use uniformity in your approach Any account that goes 30 days overdue gets a seven day warning letter unless they have contacted you and you have an accepted arrangement in place and are sticking to it.
The one and only warning letter you send should have the following information.
How much is owed.
When it was due.
How long they have to pay before it goes to DC. (Seven days is most effective as it’s short enough for urgent action to be needed, but long enough to access funding if needed)
What agency it is going to. Using the agency name adds around 25 percent to the effectiveness of the letter in my experience as it adds credibility.
The costs of collection, should it be referred.
The account to pay the money into (this will save the usual face-saving call of “I never got the invoice”.
The above has every time worked better than any comparable method that I have seen in working with thousands of BOP businesses. Once a debtor has experienced the multi-step system they can tell what part of the cycle they are in and can actually slow down payment.
Charging a 10 percent late payment fee after 60 days also works in speeding up payment, but this must be in your agreed terms as should collection costs, to comply with legislation.
If your debtors don’t pay after a seven day warning letter then send the debt to a collection agency. Bad debts hanging around do not get more valuable, they are not classic cars or a fine Burgundy – the older they are, the less they are worth
Aged debt is not only robbing businesses of cashflow but of productivity. Every time a staff member sends an email that won’t get answered, a letter that will get “lost in the post “ or leave a message that didn’t get passed on, the business suffers. And every time I have seen a client wait till the debtor comes right, they never do.
Remember having debt may not have been your choice. But the way you deal with it always is. Companies like EC Credit Control now offer a collection feeder system that integrates with XERO and MYOB that seamlessly transfers accounts for collection action, making it quick and easy to get these time and money-consuming tasks off your plate.
Just a thought.