What is the Difference Between Debt Collection & Debt Recovery?

Debt collection and debt recovery sound like they have the same meaning, but there is a subtle difference. Debt collection involves general measures taken to recover money owed by late payers. This might include telephone calls, reminder statements, specific ‘collection’ letters that request payment, or a pre-court ‘Letter Before Action.’

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Debt recovery, on the other hand, is the recovery of a debt after it has been written off in a company’s accounts. So let us take a closer look at each of these terms.

Debt Collection

The effectiveness of debt collection techniques often depends on your industry, whether you are a sole trader or limited company, how many staff you employ, and your relationship with customers.

The most important aspect of controlling bad debts is adopting a formal credit management policy before you even consider offering credit. Without this in place, you run the risk of suffering a large number of late payments that could eventually put you out of business completely.

Credit policies might include credit-checking potential customers, giving customers a copy of your Terms and Conditions, adhering to strict credit limits even when your customers are asking for more, and sending out invoices as soon as work has been completed or a product sold.

Once a payment has been deemed to be late, you or your debt collection agency will start to contact the debtor by telephone, letter, fax or email to try to elicit payment. The tone of letters will become increasingly formal and assertive as time goes on, finishing with a Letter Before Action if you decide to take the matter further by going through the courts.

Debt recovery

Going to court can be an expensive way to recover your debts, and even if the judgement is made in your favour, there are no guarantees that payment will be made. This might lead on to further costs for getting the judgement enforced, resulting in a legal bill potentially bigger than the original debt.

This is the reason why many small business debts are written off in the accounts at the end of a financial year, but there remains a small possibility that these bad debts can still be recovered.

You may have contact with a debtor several years later, who wants to do business with you again, and you are able to recover the historic debt. Or maybe you choose to hire a debt recovery agency to target bad debts over a specific amount for the past few years.

Whatever the reason for continuing to chase these debts, it is important to know that even money that has been written off in your books can be recouped. Some companies specialise in this type of debt recovery, and offer a national or international people tracing service for debtors who have absconded, or simply moved house without telling you.

To give you an example, ‘First Locate’ are a debt recovery firm with offices in Leeds and Scarborough. They offer a tracing service that is used by larger debt recovery firms, utility companies and banks, in addition to smaller businesses, to trace individuals and collect debts. They offer a ‘no success, no fee’ basis of charging, are licensed under the Consumer Credit Act, and are members of the Credit Services Association.

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