Aug 22, 2023
Commercial debt collection is the process of the recovery of outstanding amounts of money owed by one commercial entity to another. This can be because an invoice was not paid on time or an unpaid, contractually owed amount became a commercial debt. The entity owed money is called a "creditor", and the one owing the money is the "debtor".
Debt collection is a regulated business in most countries, but commercial debt collection is usually not regulated. Commercial debt collectors collect only from those individuals acting in a business capacity or commercial entities such as private and publicly owned companies worldwide. Businesses with "b2b" (business-to-business) models enter into commercial agreements often called “Client Agreements” with contractual obligations which both parties must fulfil according to the terms of the agreement and the jurisdiction which governs it.
Collecting commercial debt can be difficult for creditor companies and individuals acting in a business capacity, especially when they find themselves overwhelmed with many debtors and the debt has been outstanding for a long time. Aged debt impacts cash flow, and often this can cause some businesses to struggle or close.
If you are a creditor that is owed money, fortunately, there are ways to make it a little easier on yourself using these steps.
Before entering into any agreement with clients, ensure you have a firm contract. The commercial terms of your agreement should be as straightforward as possible, reflecting as closely as possible the workflow, deliverables and business model between your company and your client's company. Freshbooks defines how to write a client contract here for US companies but has relevancy for companies worldwide.
An essential part of your agreement is the payment terms, including repercussions when a company misses its due date. These are called the financial penalties for late payment.
The more detrimental the effects are of the financial and legal penalties, the more leverage you have as you move forward in the commercial debt collection process. However, avoid making the contract too complicated so that it's either hard to understand, hard to enforce or unnecessarily long. Sometimes the best agreements are pretty short but contain precisely the right points.
According to UK Late Payment Law, you can claim statutory interest of 8% per annum and debt recovery costs if another business defaults on the agreed payment terms.
However, some companies set their own late payment penalties which are much higher than the statutory amount mentioned above, as follows;
• Monthly interest (2 – 4%, depending on the invoice amount being charged)
• A flat late payment fee instead of an interest rate
• A clause that states if you have to incur any third-party services such as lawyers or debt collection agencies, the cost will be the client's responsibility.
• An invoice admin fee per each invoice.
Make sure not to charge excessive amounts, however. Always stick to your country's laws because if you enter into a legal recovery, you could lose if a court deems your measures overly arduous or extreme.
Commercial debt collection companies tend to work on a "no win, no fee" or "contingency" basis. Contingency means that they are only paid if they recover the debt.
Before you instruct a commercial debt collector:
Think about what you'll say and how they'll impact that person into doing what's right (paying their debt).
Instead of immediately threatening legal action, try the following:
1. Engage with the debtor. Send an email reminding them of their contractually binding payment obligations and the balance due. Ask for a response and issue a deadline.
2. If you have not received a response in a week, elevate your efforts with daily phone calls. Again, reminding of the balance due and even offering a payment plan.
3. If there isn't any dialogue or effort after another week, increase the 'threat' by adding interest, admin fees, or any other warranted fees.
4. Remind your client that if you must involve a commercial debt collector or lawyer, the fees might be their responsibility (depending on the terms), increasing what they owe.
5. The next step if these efforts fail should be to instruct a commercial debt collector.
6. Legal recovery always comes after you have exhausted the "free options", i.e.: already tried recovering the debt using a commercial debt collection agent.
The key is not to make empty threats. For example, don't immediately threaten legal action without first consulting with a lawyer or researching your available legal remedies, the cost and chances of success.
As you work through the process, keep in mind how your actions will look to a lawyer or judge. If the case escalates and you must take it further, don't let your actions be the problem. Be responsible and use effective tactics. State the facts and avoid becoming argumentative.
It's usually better to avoid legal action but If it comes down to it, consult with a lawyer. Do your due diligence before choosing which law firm to represent you. UK based solicitors and some international law firms are listed here. Try to find law firms that offer complete transparency and will give you free appraisals and a list of services they'll offer. Investing in legal action can be costly, and there is no guarantee of success. There are many factors involved.
Payfor offers further advice and information about Legal Recovery here.
Author: Giles Goodman, Founder CEO of Payfor Limited
Drawing from his solid experience in commercial debt collection, Giles
offers invaluable expertise in solving claims owed between companies worldwide. Through his writing,
Giles shares insights tailored to business owners, leveraging his wealth of experience to provide practical
guidance and support.
This blog post is intended for informational purposes only and should not be construed as legal advice. The information provided in this post is based on general principles and may not apply to specific legal situations. Laws and regulations vary by jurisdiction and can change over time. Readers are advised to seek professional legal counsel before making any decisions based on the information provided in this blog post. Payfor Ltd is not a law firm and does not provide legal services. The company disclaims any liability for actions taken based on the contents of this blog post.
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