No one enjoys going to court, and this is particularly true with debt recovery. If the debt you’re owed totals more than £5,000, it can take anything from a month to two years to reclaim it; if it’s more than £25,000, you’ll have to pay thousands of pounds, and wait months, just to get time in the High Court.
The issue of debt recovery is arguably more important now than ever; according to a report released in March, the amount of debt written off across the UK rose by 33% over the preceding 12 months, reaching a staggering £43bn – making Britain the second-worst country in Europe in terms of unpaid bills.
However, when it comes to collecting debts, you have to tread extremely carefully – or risk damaging your brand and severing ties with your customers. So it’s important to explore all possible avenues of redress, and work out the best method of debt recovery for your business.
To help you decide which is best for you, we’ve outlined the pros and cons of each one, and asked a band of seasoned entrepreneurs about their experiences.
Keeping it in-house
Before you hire an external specialist, you should use your own in-house resources to attempt a peaceful recovery.
There are several quick, easy steps you can take to boost your chances of recovering debts in-house, such as knowing your rights, being punctual in issuing letters, using experienced staff to ring debtors, and, if possible, hiring a seasoned credit controller to oversee the process.
The most successful debt chasers are those with a rigorous management strategy in place. One such company is marketing agency Iris, whose CEO Ian Milner says:
“You need to know exactly which member of your client’s team handles invoices, so you can speak to them directly, and understand the circumstances behind the debt. An invoice may have a typo on it, or the wrong amount, or maybe it exceeds the client’s level of authorisation, so you need to know the detail.
“Our approach is very successful – it’s the only way to have long-term and sustainable relationships. We’ve never had to go beyond this early-stage mediation.”
Susanna Simpson, founder of Limelight PR, says the personal touch has nearly always worked for her:
“Before hiring external help, we’ve used communication over phone and e-mail ourselves, and in all but two cases it’s worked. Everyone in business knows some months are tough, but when people stop talking to each other it’s really gone wrong.”
Solicitors
However, there are occasions when the personal, friendly approach just doesn’t work, and you have to hire outside help. In many cases, people will hire a solicitor for this purpose – the solicitor will send a letter to the debtor, demanding payment, and take the case further if this isn’t successful.
A solicitor’s letter naturally carries weight, and can often shock a debtor into action. Furthermore, Simpson says that solicitors “take the emotional side away, which can be good because you’re really close to it.” Simpson adds that, in the past, her company has paid “around £500 for a basic letter and response service, but we’ve got £30,000 back so it’s been worthwhile.”
A solicitor can be particularly useful when chasing international debt. Matt Cowley, CEO of ad agency The Bank, says his company has “sometimes had to chase overseas clients, so we’ve involved local legal entities. A local lawyer is great because they speak the language, and understand the nuances.”
However, the downside of using solicitors, as Susanna Simpson says, is “the cut-off of all future business opportunities with the client. A solicitor shows you’re very serious and you’re not giving up, but I have to be certain I’m not going to be working with the client again before I engage a lawyer.”
Furthermore, you have to be careful that your solicitor is sending out letters in the correct tone, without being overly severe. Matt Cowley says that his company “demands full control of the letters solicitors issue on our behalf – we check the tone and turn it up or down as necessary. We would never let something go out unseen.”
Mediators
If you’re looking for someone slightly softer than a solicitor, you may want to hire a professional mediator, who specialises in bringing disputants together and agreeing an amicable compromise.
Generally, the mediator offers initial consultation to establish the background and rules of engagement, before arranging a meeting between all parties, at a neutral venue, and trying and work out a mutually agreeable solution.
Stephen Bentley says his company has passed five cases to mediation, and all have been resolved satisfactorily. He adds: “Mediators have worked well for us – because our natural attitude is to mediate, it fits with our strategy. The mediators have been fine, and the mediation discussions are always amicable, productive and open.”
However, he adds that “mediators are more expensive than a solicitor sending out a letter – in our experience, fees can reach £1,500. If it’s a £20,000 debt then it’s obviously worth involving mediators, but if it’s a debt of £2,000 then obviously not.”
Debt collection and debt recovery agencies
If you want to go ultra-direct, you can hire a specialist debt recovery firm to take on the debt and manage its collection. In theory, debt collection agencies should be the most effective of the methods available – as specialists, they should have the time, resources and expertise to focus on your case and resolve it quickly.
However, the reality is often far different, as Stephen Bentley says:
“If you pass the debt over to a debt recovery firm, they’re just interested in the returns they’ll get. I’ve had experience of one before in a past company, and I was extremely disappointed. I’ve been here (at Granby) eleven years and we’ve never used debt recovery.”
Victoria Pooley, owner of Ipswich-based company The Data Partnership, is equally critical: “We went down the debt collection route a few years ago, but they weren’t as efficient as we expected. The debt collection agency didn’t have the expertise to come up with a payment plan, and didn’t have the client communication skills.
“They didn’t understand why someone couldn’t pay, and couldn’t identify potential problems. We would give them a list of people to contact and they wouldn’t do it.”
Which is best?
Many businesses find it best to steer of debt recovery agencies, unless all other avenues have been tried. Each of the other three routes could prove quick, painless and effective, provided you pick the one best suited to your business.
If you’re running a business based on communication, such as those based in PR or events, you’ll probably want to focus all your energies on a gentle approach, based on in-house liaison, with a professional mediator as backup. Alternatively, if you work in an industry such as manufacturing and construction, where bad debts are common and client communication is less important, you may wish to call in the solicitor at an early stage.
As long as you understand the nature of your business, and clients, you’ll stand a better chance of success in chasing debts –whichever route you choose.