Are you a business owner or creditor and are worried that continuous debt collection mistakes will disrupt your cash flow and general finances, eventually damaging your business overall?
If so, you are probably feeling quite stressed about these repeated mistakes that are causing the financial issues that you are likely experiencing at the moment.
Debt collection can be a difficult thing for business owners, especially if they are just starting out and haven’t really had much experience in the field.
Developing a great debt collection process early in the game can be great, but it can also mean that mistakes you’ve made earlier are continuously repeated.
This is why having a list of common/potential mistakes that business owners make with debt collection can be helpful for you to identify these mistakes so they can be changed!
In this article our debt collection agency team will discuss some of the more common mistakes that business owners and creditors make regarding debt collection and how you can avoid them.
Debt Collection Mistakes - Not Knowing Your Client
The first common mistake made by business owners regarding debt collection is not taking the time to know their clients before forming an agreement with them.
Would you give a stranger $100 on the premise that they will pay you back later? Probably not, right?
Well, why would you allow your business to do the same thing, maybe with a lot more money, without knowing beyond the basic details about a potential client?
This is what a lot of business owners do as they either do not think to or do not have the time to conduct some research on a client before forming an agreement with them.
In this age of social media and online lives, you can find a lot out about a person with a simple google search.
However, you may benefit further from running a due diligence check on a client. You can do this with a due diligence report!
However you choose to go about it, do a little research on a client before making an agreement with them, it can prevent you from engaging in business with untrustworthy and unreliable people!
Not Formalising the Agreement
Another common mistake made by business owners and creditors regarding their debt collection processes is not formalising an agreement between themselves and their clients in writing.
If your business is offering credit, you are entering into an official agreement with a client that allows them to pay you back over time instead of straight up for your product or service.
This agreement needs to be on paper!
It does not matter how well you know a person or how much you trust them to pay you back, not having a contract or something similar can be very damaging to your business and debt collection process.
There is not much that anyone can do if you do not have an official agreement with someone and they don’t pay you back!
A court will require evidence of an agreement (if it comes to the point of litigation) and if you cannot provide it, you are highly unlikely to win your matter and collect your money.
Just draw up a simple contract that states the service you are providing and the payment terms, and any other essentials, and have your client sign it, it can prevent a lot of issues in the future!
Debt Collection Mistakes - Not Prioritising Cash Flow
A further common mistake made by business owners and creditors when it comes to the topic of debt collection is that they are not prioritising their cash flow.
This mistake applies to most areas of your business, debt collection of course being one of them, as not properly prioritising your cash flow can be very damaging.
In the case of debt collection, however, you must ensure that you put your cash flow before the personal craving to collect a debt from an unpaying client.
Difficult clients are the worst. There is probably nothing more satisfying to you as a creditor than finally collecting a debt from someone who seems to just not want to pay.
Justice has finally been served.
However, as great as this feeling is, making an informed and well-thought-out assessment as to whether or not collecting this debt, and the expenses of doing so, will benefit your cash flow.
Furthermore, you should consider the way in which you do so and how it will affect your cash flow.
The expenses of legal action or other routes for debt collection can do more harm than good to your cash flow, so choose wisely.
Debt Collection Mistakes - Having Ineffective Invoices
One more common mistake made by business owners and creditors regarding their debt collection process is not using the tool of invoicing effectively.
Invoicing is an extremely important element of collecting debts and managing clients.
An invoice should include all of the information that a client will need to pay you for your services.
If you are not including the right information or send them out properly, you will probably not receive your payments as you wish.
The first thing that you should be doing is ensuring that you are sending out your invoices on time.
This can make sure that your clients have their invoices faster and you will, in turn, be paid faster.
Another tip for effective invoicing is to ensure that you include all of the information that your client may need or want when reading the invoice.
This can prevent them from constantly calling with questions or not paying the invoice until prompted by you to do so.
11 Common Debt Collection Mistakes to Avoid
Debt collection mistakes can cost a business dearly, impact cash flow, and in extreme cases, cause the business to become insolvent.
Debt collection is a critical process for any business that wants to maintain its cash flow.
It involves recovering outstanding payments from clients and customers who have not paid their debts on time.
Debt collection and following up with your debtors can be a difficult and time-consuming task, and if not managed properly, it can result in legal troubles, poor customer feedback, and, eventually, revenue loss for the firm.
In Australia, businesses who try to collect their own debts must still adhere to a number of regulatory regulations and best practises to ensure that their debt collection activities are successful, ethical, and compliant with all State and Federal laws.
Debt Collection Mistakes
We see a lot of people and a lot of debts and different debt scenarios, and we see a number of common debt collection mistakes, including (but not limited to):
- Harassing the Debtor Customer
- Failing to Verify Debts
- Ignoring Debt Collection Laws
- Not Complying with Time Limits
- Using Illegal Tactics
- No (or bad) Credit Policy
- Failing to Follow Through
- Failing to Call the Debtor and Chase the Debts
- Being Too Kind to the Debtors
- Defective Follow-ups
- Not Being Consistent with Debtors
Our debt collectors will explain these in more detail below.
Debt Collection Mistake 1 - Harassing the Debtor Customer
One of the most significant mistakes businesses make in debt collection is harassing debtors.
Harassment can take various forms, such as repeatedly calling or texting a debtor, using abusive language, threatening to take legal action, or contacting them at inappropriate times, such as late at night.
These types of debt collection practices are not only considered to be unethical, but also unlawful under the Australian Consumer Law (ACL).
The ACL prohibits businesses from engaging in unconscionable conduct when dealing with consumers, including harassing or coercive behaviour.
Therefore, it is vital that Australian businesses trying to collect their own debts maintain a professional and respectful approach when trying to collect their debts from their debtors.
Australian businesses should attempt to follow the debt collection guidelines contained in the ACL and the ASIC Debt Collection Guidelines.
There are strict rules governing how, when, and how frequently a business can pursue debt collection from a debtor client.
If you make a mistake, you might be the subject of legal action or a legislative penalty. If you are "overly active" in pursuing your debts, this might be seen as "harassment" which no one wants to be accused of.
Debt Collection Mistake 2 - Failing to Verify Debts
Another common mistake that businesses make in debt collection is failing to verify the debts they are trying to recover.
Verification involves confirming that the debtor owes the debt and the amount owed is accurate.
Debt verification is necessary to ensure that businesses are not attempting to collect debts that have already been paid, have expired, or are otherwise invalid.
In Australia, businesses who are “credit providers” should provide their debtors with a written notice that outlines the amount owed, the creditor's details, and detailed information on how to dispute the debt.
Debt Collection Mistake 3 - Ignoring Debt Collection Laws
Privacy laws are another crucial consideration for businesses in debt collection.
The Privacy Act 1988 of Australia governs how companies acquire, use, and disclose their debtors’ personal information, including all debt-related information.
The Privacy Act imposes stringent standards on corporations to preserve individuals' privacy and limit the use of their personal information.
Before providing personal information to third parties such as debt collectors or credit reporting organisations, businesses must acquire the debtor's consent.
They must also guarantee that the information they gather is correct, up to date, and pertinent to the debt collecting process.
Debt Collection Mistake 4 - Not Complying with Time Limits
Debt collection in Australia is subject to several time limits and deadlines that businesses must comply with.
For example, the limitation date for a debt is (usually) six (6) years from the date of non-payment, unless there has been a written acknowledgement of debt, or a payment made.
Businesses that offer credit contracts and who are credit providers must also comply with time limits when reporting debts to credit reporting agencies.
Under the Privacy Act 1988, businesses can only report debts that are more than 60 days overdue.
They must also provide debtors with a notice before reporting the debt and give them an opportunity to dispute it.
Debt Collection Mistake 5 - Using Illegal Tactics
Businesses must avoid using illegal tactics when collecting debts.
Illegal tactics can include making false or misleading statements, misrepresenting their legal rights, or threatening violence or harm.
Debt collectors in Australia are expected to follow certain laws and regulations while seeking to recover outstanding debts.
Debt collectors are prohibited from using violent or intimidating techniques to push persons into paying debts, such as threatening legal action or bodily damage.
Debt collectors must also avoid calling people at inconvenient times, such as early in the morning or late at night.
These rules have been enacted and put in place to protect individual debtors from harassment and to help to ensure that the debt collection processes are fair and legal.
Any debt collector who is proven to be utilising unlawful practises may face harsh consequences such as fines and legal action.
As a result, it is critical for businesses who are attempting to conduct their own debt collection to operate within the rules and regulations, and the law in order to avoid potential legal problems.
Collection Mistake 6 - No (or bad) Credit Policy
Establishing credit policy and credit contracts for small and medium businesses should happen before the first sale, especially in high-ticket, high risk, or service-oriented areas.
Without a credit policy in place, or with a bad credit policy in place, it will likely cause significant problems if this debt remains unpaid or proceeds to legal action.
Therefore, a good credit policy and credit contract that identifies checks and balances for low, moderate, and high-risk consumers is necessary.
A lack of or a credit policy might expose creditors to a number of dangers.
One of the most significant issues that a business may face is the greater risk of lending to individuals or businesses that may be unable to repay their debts.
This might lead to a significant bad debt, which reduces the creditor's cash flow and profitability, or even (if the debt is large enough) make the creditor insolvent.
Not having good credit documents might result in legal ramifications and harm to the creditor's reputation.
Furthermore, without a strong credit policy, creditors may struggle to collect existing debts, necessitating additional expenses and resources to recover revenues.
Debt Collection Mistake 7 - Failing to Follow Through
When small businesses have the time, they frequently pursue debt collection.
It's just the nature of a small business to never have enough time to do everything a small business owner is required to do.
But we've discovered that debt collection is one of those time-consuming tasks that business owners will typically put off for as long as they can (it is a horrible task, you have to admit).
Calling a client with whom you formerly had a trusting relationship to inform them of a past-due balance may be awkward, therefore that chore is often put off.
Following through on any past due accounts immediately and consistently is critical to enhancing your prospects of debt recovery.
Don't drop the ball until you can afford to not recover that debt.
Mistake Number 8 - Failing to Call the Debtor and Chase the Debts
Businesses that simply employ one or two strategies to contact a past-due client may fail to bring in their aged debts.
This is because just phoning or sending a letter will sometimes not be enough to get the task done on a frequent and ongoing basis.
A well-designed debt recovery procedure adheres to regulatory rules for customer interaction while nevertheless reaching out to customers in a number of methods that capture their attention.
Keep calling, keep emailing, and keep following up with your debtors.
Mistake 9 - Being Too Kind to the Debtors
To avoid giving your consumers the wrong impression, as a business owner, you must learn to stay between the two extremes.
Some debtors are opportunists, and they would take advantage of your generosity to extend the debt payment.
There is definitely a balance between being too mean and too nice. It is important that you remain professional, but firm.
As a result, staying in the middle is the best approach to address this.
Demonstrate that you understand your clients' problems while remaining persistent and resolute in collecting on overdue debts.
Mistake 10 - Defective Follow-ups
It is not sufficient to wait until a debt is due before reminding your consumers of the agreement.
You should delegate the obligation for recovery of outstanding invoices and overdue debts if necessary.
It assists the customer in avoiding forgetting. Be familiar with all service-related information, including dates and agreed-upon charges.
Engage your debtors in a courteous manner, alerting them about the payments are past due.
Your regularity maintains you in the clients' minds, which will entice them to pay up promptly.
Mistake number 11 - Not Being Consistent with Debtors
Everyone appreciates openness. If you promised anything to a consumer, never fail to follow through on that promise. Be open and honest about the agreement and everything around it.
If you agree to a payment plan, follow through on it. Being consistent, truthful, and dependable encourages customers to return the favour.
Also, set dates and times every time you speak to your debtor. Never let a conversation or email go open-ended, with no requirement for a date or time that they have to do something by.
Then set a reminder and follow up on that date.
Consider Using Debt Collection
Have you tried to improve your debt collection process the best you can, only to have clients still not paying on time or at all?
If so, it may be time for you to start considering hiring a debt collector to solve these problems for you!
A debt collector is a professional in the field of debt recovery and will have access to tools and experiences that will make their collection process much more effective and successful.
They can also engage in some of the tasks that you may need just for your matter, like skip tracing to locate a missing or unreachable client.
Hire a debt collector and submit your debt online today!
Debt Collection Mistakes FAQ
Welcome to our FAQ section on debt collection mistakes! Debt collection can be a challenging task for business owners and creditors, especially when mistakes are made along the way.
In this section, we will explore some of the most common pitfalls that businesses encounter during debt collection and provide valuable insights on how to avoid them.
Whether you are new to the field or looking to improve your debt recovery process, these FAQs and their answers will help you navigate the intricacies of debt collection and ensure a smoother financial journey for your business.
What are some common debt collection mistakes made by business owners and creditors?
Some common debt collection mistakes made by business owners and creditors include not knowing their clients before forming agreements, not formalising agreements in writing, not prioritising cash flow, having ineffective invoices, and engaging in harassing or illegal tactics.
Why is it important to know your clients before forming debt collection agreements?
Knowing your clients before forming debt collection agreements is essential to avoid engaging with untrustworthy and unreliable individuals. Conducting research on potential clients helps identify their credibility and ensures you do business with reliable parties, reducing the risk of financial issues.
How can formalising agreements in writing benefit debt collection processes?
Formalising agreements in writing, such as using contracts, is crucial for debt collection processes. It provides legal documentation that serves as evidence in case of disputes or litigation. Having a written agreement with clear payment terms reduces the chances of payment issues and protects the business's interests.
Why is prioritising cash flow crucial in debt collection?
Prioritising cash flow is vital in debt collection because it ensures a steady stream of revenue for the business. While it can be tempting to pursue difficult debtors aggressively, considering the potential expenses of debt collection actions is essential to avoid harming the overall cash flow.
What are some common illegal debt collection tactics that businesses should avoid?
Some common illegal debt collection tactics to avoid include harassment, using abusive language, making false or misleading statements, threatening violence or harm, and contacting debtors at inappropriate times. Engaging in such practices not only damages the business's reputation but also leads to legal consequences and penalties.
Advance debt collection is an Australia-wide commercial debt collection agency and credit and accounts receivable management. We can recovery your debts, conduct skip tracing, and manage your accounts receivable. We collect your debts for commission only. This means no collection, no commission. We are professional debt collectors with combined 20 years of experience to help you collect your debts. We are partnered with expert litigation lawyers with years of experience in debt recovery, enforcement, and insolvency. Under the Agents Financial Administration Act 2014 Advance Debt Collection Pty Ltd hold authority number 4583821 to act as a debt collector. ADC Advance Debt Collection® is a registered trademark.