smallbusiness.co.uk: Helping your business think big

Sooner or later almost every business finds itself desperately struggling to track down payment from an aloof customer. Where conventional methods fail, debt collection agencies offer an alternative solution. Their reputation is mixed, yet figures from trade body the Credit Services Association (CSA) indicate that its members are still responsible for recovering up to £5 billion each year.

To David Sullivan, of Business Link for London, however, it is important that business owners remember the employment of such agencies should be a last resort.

There are several reasons for this. Firstly cost; the fees associated with debt collection services vary from agency to agency (some even offer flat rates), however, a charge of around ten per cent of the amount being recovered is not unusual. In addition, there may also be further fees for the issuing of letters or the dispatching of bailiffs if court intervention is required. Before employing a debt recovery agency it is therefore advisable to know exactly what costs you are liable to encounter.

In addition to expense, Sullivan points out that ‘in most cases the hiring of a debt collection agency will be the death knell of the relationship [between business and customer]. After all, you, as a business, will be unlikely to extend further credit to a client who has forced you to take such action.

Perhaps most significantly of all, there can be issues relating to the protection of your reputation. ‘You’ve got to be careful in defending your own brand,’ Sullivan advises. ‘You have to make sure you’re using a reputable firm of debt collectors. If you’re not [and they are employing heavy tactics] word does gets around.’

This issue of respectability is one the Office of Fair Trading (OFT) is currently investigating. It instigated a series of guidelines to the industry in 2003 and subsequently received close to 1,800 complaints about debt collection firms in just two years and went on to warn 79 agencies with regard to their conduct.

Further measures are now being considered. ‘We welcome the review entirely in the same way that we welcomed the guidelines – and engaged heavily in the process – when they were originally published,’ CSA president Scott Soutar comments.

Sullivan’s reading of the situation is pragmatic. ‘The CSA is working very hard to get code of practice in place,’ he explains, before suggesting it wise to check that a debt collection is registered with the CSA before appointing them.

Prior to that, however, he notes that ‘we suggest chasing debts up internally, putting procedures in place and employing a bookkeeper to keep an eye on things for you. Many banks are directing their customers down the invoice discounting/factoring routes – although this in itself can prove to be expensive.’

Click here for a Guide to chasing money you are owed.

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