News Article

Debt Collection

Outsourced Bad Debt Recovery

By CreditMan Monday, September 15, 2014

A surprising number of large businesses in the UK still rely on an internal debt recovery function to manage “bad debt” cases once their credit control activities have been exhausted. There are a few firms who have a reputation for utilising this function to great effect, while the majority are merely carrying a sizeable fixed overhead with an ineffective return.

If the debtor has already chosen to ignore a number of chasing letters written on the company letterhead, any further “pre-legal” warning letters from the same source are unlikely to suddenly provoke a payment. As a result, many firms have created a separate trading name for their internal debt collection department. This creates the impression of a third party dealing with the debt matter once it has reached the threat of legal action. In the majority of cases this practice is within the confines of the law and is, at its worst, a little misleading. However, the recent media hornets’ nest created by the activities of Wonga, Lloyds, The Student Loan Company and others, has shone the spotlight on the legalities, moral implications, and the effectiveness of internal debt recovery functions.

Here are 5 good reasons why Financial Directors should be questioning the use of in-house debt collection functions:

1: Effectiveness: A credible solicitors’ letter carries a significant weight as the threat of escalating the case through the legal process suddenly becomes very real to the debtor. It’s widely recognised that “pre-legal” debtor communications from a credible law firm are more effective in generating payment than further in-house actions, or those of a debt collection agency (DCA). Furthermore, the power and effectiveness of “letters before action” from in-house debt recovery operations has been somewhat reduced by the debtor scrutiny of such communications following the media publicity of the Wonga-type operations.

2: Good-cop-bad-cop technique: Having given the debtor every opportunity to pay, the advantage of referring to an external legal recovery firm is that the creditor can then divorce themselves from the process at that point. This approach also assists the creditor in maintaining an ongoing trading relationship with the customer if desired.

3: Keeping up-to-date: Significant legal changes frequently occur within the realm of debt collection, with new or amended legislation impacting on the recovery process and it’s associated costs. A swift awareness and thorough understanding of these changes can be key in maximising your recoveries, while minimising the cost in doing so.

4:Experience: Solicitors are experts in the law of debt recovery and enforcement. As the UK’s leading debt recovery solicitors, Flint Bishop have spent years developing an array of bespoke tactics and approaches to elicit payment from even the most professional of debtors. We have developed experience of successful recoveries for different industries and debtor types, conducted in a way that avoids creating unnecessary antagonism between creditor and debtor. For this there is no substitute, and our debt realisation rates speak for themselves.

5: Overheads: Perhaps most importantly, how do you effectively employ people to undertake this function in-house? The volume of bad debtor cases can vary from month to month, and will hopefully reduce over time as a result of internal improvements in credit management.

Insufficient resource means that bad debts are ineffectively pursued, and too much resource is a luxury that companies can ill afford. That time and money could be better spent:

Improving internal processes to reduce the volume of delinquent debtors;
Developing existing accounts; or
Creating new opportunities – concentrate resources on future sales, not past debt

If your credit control requirements vary from month to month, outsourcing can mean “pay as you go”, saving you the cost of resourcing for the busy periods. Even if your requirements are consistent, we have still found that increased efficiencies and economies of scale can make outsourcing a cheaper option.

For example, you will need to operate some sort of case management system and a court process to run an effective debt recovery operation and you will need to incur the cost of this and the management time solely for your business. We, on the other hand, can absorb this cost and time across all of our clients and projects, thereby reducing the burden for your business. Whether as a fixed monthly retainer or a “pay as you go” service, we are confident that our outsourced operation can save you time and money.

Always remember that the use of an external law firm for recoveries is in no way a failing of a credit control function, it is in fact a demonstration that they are making use of one of the most effective and efficient collection tools available to them.