Engaging a Credit Management and/or a Debt Collection Agency in 2021
In October 2019, an Atradius investigation, in cooperation with 2.770 Western European companies, found that 60.4% of B2B sales are concluded on credit. Of that total, an average of 28.9% was flagged as past due invoices.
A sharp rise of 69% of uncollectable receivables was registered in 2019 (from 1.3% to 2.2%). Due to the uncertainty caused by the elections in the U.S. and its trade war with China, another growth of insolvencies was expected for 2020. On top of that, the Covid-19 situation and the crisis that this implies is already showing some effects on overdue receivables. Sidetrade has developed a software based on artificial intelligence in which you can see the effects of Covid-19 in unpaid invoices. This software is currently analyzing six countries: France, UK, Spain, Italy, Belgium and the Netherlands. A strong increase of 22.8% in the average percentage of unpaid invoices (10+ days after their due date) can be seen in these countries since the start of the pandemic (results as of July 11, 2020). If we take into account the increase in these six countries and infer that the increase in the rest of the Western European countries will be similar, this can be translated into approximately 35.48% of credit sales resulting in past due invoices. It is not yet possible to have a clear idea of the effect of the Covid-19 situation on uncollectable receivables, but it will undoubtedly be greater than predicted due to, for example, the rise of companies going bankrupt or the rise of unemployment. To put all this into perspective: if the accounts receivable of a company are €100.000, this could potentially lead to €35.480 of past dues.
Based on our clients’ increased requests for our assistance in collecting overdue invoices, we strongly believe that right now is a key moment to further strengthen present and future cash flows by engaging with a Credit Management and Debt Collection Agency, while at the same time maintaining and nourishing good relationships with clients. But the question remains: why and when should a company resort to one of these two services? Below you will find an answer based on our experience.
Why should you engage a Credit Management Company?
Would it be safe or efficient to clean the windows of a building with more than 10 floors without the necessary tools and experience? Of course not. This analogy applies to the question why to engage with a Credit Management company. And at the moment, strong winds are hitting the building (the current world situation). The financial growth of your company depends on how fast your clients pay their invoices. Sometimes, your company may lack the required resources to actively pursue the group of late payers, which has immediate consequences for your cash flow. By outsourcing this activity, clients can be pursued with due invoices – saving you time and money. Credit Management companies provide continuity and know-how in your accounts receivable process improving your cash flows.
Please do not think of this service as a standard service. Credit management should always be carried out with a tailor-made approach. Since each business is different, with different products and services, different customers, and so on, outsourcing credit management should always function as an extension of your business.
You can read more about this here!
Why should you engage a Debt Collection Agency?
Debt Collection requires different communication and negotiation skills, and of course a lot of experience. Our experience shows us that Debt Collection in times of a crisis is different in many ways, but especially in communication skills. Since CMC is an international company and we cover the whole world, we have already experienced several crises in different regions and countries. This has allowed us to earn a lot of insights into which strategies to use in more complex times and contexts, like the one we live in today.
Besides this, there are five important reasons more to engage a Debt Collection agency, as we discussed in our previous blog “5 reasons why it is wise to engage a Debt Collection agency”:
- Legal protection – There are numerous laws that apply to the Debt Collection industry. Engaging a Debt Collection agency eliminates the legal risks associated with attempting to collect debts yourself.
- Successful collection – Summoning someone to pay is more than sending a reminder. Debt Collection agencies have experience in collecting unpaid debts. A trained professional knows the best techniques to legally summon debtors to pay your invoices.
- Flexibility – Debt Collection agencies often offer the choice between a standardized approach towards your debtors or one that seamlessly matches the needs of your company. This also applies when it comes to the payment method towards you as a client: different payment methods are used in the Debt Collection world. Some Debt Collection agencies pursue debtors for a fixed amount; others work according to the ‘no win, no fee’ principle. With this principle, the collection agency will only receive commission if the amount or part of it has been successfully collected.
- Documentation and legal advice – Engaging a Collection agency ensures proper documentation of the collection process. When Debt Collection agencies communicate with debtors, this is registered in their Debt Collection system. Should you decide to sue a debtor in the future, the Debt Collection agency will have a solid record of every attempt to collect the debt. This documentation shows the court that you have made extensive efforts to collect the debt extrajudicially.
- “A big stick” – Engaging a Debt Collection agency ensures that companies pay you faster. The statistics confirm that if a company has previously dealt with a Debt Collection agency because of you, they will pay you on time in the future.
"Debt Collection requires different communication and negotiation skills, and of course a lot of experience. Our experience shows us that debt collection in times of crisis is different in many ways, but especially in communication skills"
When should you engage a Credit Management and Debt Collection Agency?
Companies are often not aware of the fact that if debtors are not chased in time, the chances that the debts are collected become smaller as time increases. In fact, the probability that a commercial debt will be paid decreases each semester by 15% (or 30% annually). For consumer debts, this probability decreases by 22.5% each semester (45% annually). This is why it is very important to keep track of the accounts receivable: to avoid past dues becoming uncollectable.
To summarize, you should engage with a Credit Management company when your cash flow is affected by the amount of unpaid overdue invoices and if you want to prevent future unpaid invoices. On the other side, you should engage with a Debt Collection agency as soon as there is a signal or a risk of non-payment, in order to avoid that overdue invoices become uncollectable.
Why engaging with CMC Worldwide?
We strongly believe that in order to be efficient and successful in the Debt Collection process, it is crucial to have full knowledge on credit management – which can be considered as a preventive stage of involving a Debt Collection agency. At the same time, we believe that having experience in Debt Collection is also key for an optimal credit management process. This is why at CMC (short for Credit Management Company), we offer both credit management and Debt Collection services, one feeding the other with useful insights and vice versa. For both services, we proudly count on success stories from renowned multinational companies that have trusted us with the improvement of their cash flow. You can read their stories on our ambassador page.
