The importance of having a robust debt collection strategy for your business

Posted on July 9, 2024 | Mark Rolland

Efficient debt collection is a key driver for growth in a business and a fundamental part of healthy cash flows. Without the cash available when it’s needed to run the business day-to-day, there’s a risk of falling into financial decline.

If this decline worsens, the chances of entering cash flow insolvency increase a lot as the business will find it increasingly difficult to pay its own bills and wages.

So how do you protect your business by strengthening debt-collecting procedures and what does a robust strategy look like?

Developing a strong debt collection strategy

The word ‘strategy’ is key when collecting debts. Without a system or fixed procedure in place, you’re unlikely to be efficient. Strategic debt collection involves developing:

a system that notifies you of late payers and highlights those who regularly pay late.
a process for sending reminder letters and warnings at regular intervals, triggered by the number of days overdue.
clear terms and conditions of payment on invoices and other documentation. This includes notification that you’ll charge statutory interest on outstanding monies.
a method of ensuring any invoice queries are resolved immediately on raising by a customer. This is sometimes a deliberate delaying tactic used to withhold payment.

It’s also worth considering using a debt collection agency for debtors who are particularly elusive or simply won’t pay. A long and drawn-out process of chasing payments takes up too much time that could used more effectively elsewhere.

Robust debt collection starts with good credit management. This involves thoroughly checking the credit rating of customers via credit reference agencies and trade references, and not offering too high a level of credit initially.

What does collecting debts efficiently do for a business?

Helps to secure growth funding

Efficient debt collection provides the cash to pay bills and supports your credit rating so that you’re viewed as a low risk of default to lenders. A good credit score is one of the main criteria for securing loans and credit. This helps lenders decide whether to offer favourable interest rates and lending terms. These can save the business money in the long run.

Builds resilience

Cash flow insolvency occurs when a business cannot afford to pay its bills when they become due. Therefore, a healthy cash situation is crucial in avoiding this situation. A robust debt collection strategy allows the maximum amount of cash to flow into the business and be used to pay planned expenditures. This can cover costs such as utility bills and business rates, but also to cover unexpected outgoings.

Helps you build a good reputation in your market

A strong debt collection policy also offers indirect benefits. Your business’s good reputation often depends on having the cash to pay reliably as a debtor. Therefore, when your suppliers know that the business is trustworthy you may be offered more credit or longer payment terms, which supports growth.

Setting up a robust strategy for debt collection

Developing and implementing an effective debt collection strategy involves careful planning and closing loopholes that make late payments more likely. Clearly stating your terms and the penalty for paying late, for example, and regularly chasing late payments.

Technology gives you the information you need to take action when late payers jeopardise your financial stability and allows you to proactively drive the business forward.

About the author – Dave Broadbent is an insolvency practitioner and Partner at the Begbies Traynor Group. Dave specialises in small- to medium-sized owner-managed businesses, using the experience and skills obtained from a number of years within the sector, as well as those gained from running his own company.