UK commercial debt collection basics and tips for small businesses
UK debt collection is the process of recovering debts in the United Kingdom. There are licensed agencies called DCAs (Debt Collection Agencies) that collect debts by following different national laws and Acts.
Some facts about debt collection:
● Debt collection refers to a process where a DCA can attempt to recover a past-due debt from a second-party called debtor (“consumer” or “business”) on behalf of the first-party called the original creditor or lender.
● Debt collection agencies are permitted to implement different legal and ethical debt collection methods. They can collect debts and contact debtors either only within the UK territories or outside the nation.
● The Financial Conduct Authority (FCA) is a financial regulatory body in the United Kingdom which regulates the financial services industry including debt collection services. FCA protects consumers, promotes healthy competition between financial service providers, and keeps the industry stable.
Here we will discuss the commercial debt collection for small businesses and the strategies that can be implemented to recover debts.
Commercial UK debt collection
Commercial debt collection is the method of collecting business debts from debtor companies. UK debt collection agencies recover business debts from the debtor company on behalf of the creditor company. Under the United Kingdom regulations and laws, commercial or business debt collection recovers commercial loans from a debtor company. Those laws may include the Late Payment of Commercial Debt Regulations, the EU regulation for Late Payment in Commercial Transactions, the Late Payment of Commercial Debts (Interest) Act, etc.
Late payments can be a lethal issue for small businesses, reducing the ability to continue the business. As per the research from GoCardless, 2 out of 5 SME businesses encounter critical cash flow issues due to late payments. When companies try to settle the invoice and fail, they might need to start the debt collection process.
Businesses have two primary forms of professional debt collection:
● Debt collection agencies (DCA)
Practically, if businesses hire a solicitor, it is likely to be the most cost-effective choice. Businesses can send a debt collection letter, written on a legal letterhead from a reputed law firm, to the debtor SME for collecting the payment.
However, if that option doesn’t work as expected, businesses may hire a debt collection company to deal with the matter. A debt collection service can be effective in recovering debts or settling a late invoice. But often, it is an expensive option. Before hiring a debt collection agency, the creditor should know that it may cause permanent damage to the relationship between the creditor and the debtor company. Apart from that, a business may suffer from a bad reputation caused by the harsh and unlawful debt collection tactics that DCA can use.
Debt collection costs
The DCA may charge a business a fixed amount apart from the debts as the cost of recovering a late commercial payment. The amount of compensation that DCA is allowed to claim will depend on the outstanding amount of debt as follows:
|Total debt amount||Cost of recovering a late commercial payment|
|Up to £999.99||£40|
|£1,000 to £9,999.99||£70|
|£10,000 or more||£100|
*Data courtesy – gov.uk
The business can only be charged once for each payment.
Business debt collection rules for debt collection agencies (DCA)
Unfortunately, no such regulatory body is present to regulate business debt collection laws in the UK for DCAs, like the US consumers have the Commercial Collection Agency Association (CCAA), under the Commercial Law League of America (CLLA). But the Financial Conduct Authority (FCA) also implemented few rules regarding business debt collection in the UK.
● A creditor can’t hire more than one debt collection agency at a time.
● A debt collector should contact the debtor by phone, email, letter, or visiting directly. However, a debt collector must inform the debtor initially about his identity and the purpose of contacting him.
● The debt collector can’t use abusive language or threats to confuse the debtor.
● A debt will be ‘statute barred’ if the creditor does not contact the debtor for six years and does not take any action on the account.
● The debtor still owes the debt, but the creditor can’t take any legal action to get the money back. The creditor or debt collector can’t manipulate the debtor and tell him/her that they can still recover the debt legally.
● The debt collector can’t force the debtor to pay the debt if he/she refuses to pay the money. It will be considered harassment under Section 40(1) of the Administration of Justice Act 1970.
● If a debtor disputes the debt, the collection agent can’t continue with recovery proceedings. The collection agent must provide all the details of outstanding debt to the debtor. The creditor or the debt collector must prove that the debtor still owes the debt.
Debt collection strategies to implement for small businesses
Confirm the orders
● After receiving an order, small businesses should confirm the order in writing.
● Use emails to confirm the order placed.
● Add the cost and reference numbers.
Prepare proper invoices
● Add all details of the transaction, including the goods or services provided.
● Mention the correct date and other particulars.
● Add expected payment dates and terms.
Prepare monthly statements
● Prepare a monthly statement for each debtor (regular or repeat customers).
● Keep clients informed of payment due dates.
Send a reminder
● SME owners should follow up on an invoice regularly.
● They can use some accounting software that can automatically send a reminder to debtors.
● They can use emails or postal mails to let the customer/debtor know about the outstanding debt.
Call the debtor
● Call the customer/debtor if the terms are violated, and the debtor does not respond to the reminder.
● Stay calm and don’t lose your temper while communicating with the debtor.
● Try to understand the situation better by discussing the matter openly.
● Ask the debtor to discuss alternate payment options.
● Accept an agreed repayment schedule if possible.
Hire a professional debt collection agency
● Review online testimonials and client feedback before choosing a debt collection agency
● Please read all the terms before signing a contract with them.
Author Bio: Lyle David Solomon is a licensed attorney in California. He has been affiliated with the law firms in California, Nevada, and Arizona since 1991. As the principal attorney of Oak View Law Group, he gives advice and writes articles to help people solve their debt problems. You can connect with him on twitter