Finance & Accounting

Best Practices in Collection Strategies

Collection Strategies

Collection strategies are the services that maintain the balance in the lending process and cordial client relationship of a company. In the lending business, the collection is referred to as a business activity that intends to convert possible losses into income.

The collection process is defined as a strategic, well-coordinated and timely activity to collect loans from clients. The main aim is to convert the fixed accounts of delinquent holders into liquid assets as soon as possible while maintaining the client’s relationship. Generally, the collection requires timely interaction with the client and an understanding of the client’s situation over the payment duration. The client should be provided with an option to pay in different methods that are timely and appropriate to the given situation. The general practice of recording and following up with the client helps monitor the client’s situation. The current article will analyse the best collection strategies and the challenges attributable to the collection process.

What are the challenges in collection strategies?

Companies are facing a lot of problems nowadays because of the recession. The problem has reduced the money flow in the market, leading lending businesses to face losses. The shrink in the economy has impacted the company’s profit margins and has affected the business’s collection strategies. The companies’ previous methods during easy credit times may not be suitable for the current economic situation. Numerous conditions are affecting the collection strategies, including:

1. High Number of Collections

Due to the high number of collections, the collection strategies of the business become futile. A large number of consumers are facing problems in paying their debt. As people continue to lose their job, the burden of collection increases on the company, accumulating a large number of debt in the company’s financial statements[1].

2. Unreliable contact Information of Debtors

The collection becomes impossible when the client is untraceable. As people lead busy lives and frequently move to different locations, it becomes hard for the collector to trace them. Even if the collector is trying to pay the debt, it becomes hard without the latest contact information to have friendly contact with the client. This problem arises when the collection strategies do not involve multi-channel of communication. Maintaining an alternative method of contact through mail, mobile, phone numbers, or a representative can help the collector contact the client. Skip tracing could be the method to trace the whereabouts of the client.

3. Same collection Strategies

Big businesses generally make a mistake in their collection strategies. Applying the same collection process in different clients’ situations has made the company face losses. These losses forced the company to opt for different strategies for clients. Generally, different client requirements are needed to be fulfilled, which has necessitated the companies to apply different strategies in negotiating with clients and help recover full payment.

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4. Requires time in Identifying Delinquent Accounts

The fundamental challenge that the collectors face is sorting the delinquent accounts. Too much information on a debtor could also adversely affect debt recovery. Sorting contact information from large amounts of data could require a lot of time, effort, and sometimes money. Moreover, searching for delinquent accounts and analysing them is a heavy task that could lead the collector to make mistakes in the long run.

General Principles in Collection Strategies

Below mentioned are the general principles to avoid any challenges in the collection strategies:

  1. The collection strategy should be efficient so that there is a full recovery.
  2. The collection strategy should be as such to maintain the client relationship.
  3. The collection strategy should provide diverse payment options to clients.
  4. The collections strategy shall involve identifying and evaluating the client’s situation.
  5. The collection strategy should be adaptive
  6. The collection strategy should aim at receiving the maximum amount possible.

What are the Best Practices in Collection Strategies?

1. Keep ahead of bad debts

The use of applied analytics simplifies the process of debt collection. It aids in the avoidance of bad debts and intricate collections. The applied analytics will help in the process of account receivables from the client, whether the receivables are monthly, quarterly, or yearly. When the collector understands the client’s payment method, it can analyse the pattern and anticipate with them. It also assists in protecting the client from unwarranted risk. Applied analytics will be usedto analyse the client payment pattern and alert if there is a delay. This helps the collector to be ahead of the accounts that are problematic and unresponsive. To summarise, using analytics in the debt collection process saves the company from bad debt and aids in the maintenance of the company’s cash flow.

2. Provide diverse payment methods

Many businesses continue to accept traditional payment methods. Although using the word or excel templates to generate invoices maintains consistency but requires a lot of effort, which may sometimes lead the company to avoid any human error in generating invoices.If there is a delay in the payment, it is necessary to ensure that the client has received the invoice and the option for easy payment techniques. Simplifying the payment method through electronic means will help prevent errors and build confidence among the clients in the payment process. Another method of simplifying the payment technique is by reducing the burden on conventional methods and introducing the concept of an automated invoice generator. This method will ensure that invoices are sent to the client directly after the delivery of services. An automated invoice generator will reduce human errors and saves time and effort. Invoicing technology will maintain client invoices, automate follow-ups for unpaid invoices, auto-populate invoice fields and more.

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3. Diverse Collection Strategies

The diverse collection strategy will enable the collection process to be more efficient. Segmenting the customer base on their collection amount will ensure timely and more efficient collection of debt. Determining specific strategies for each group ensures optimum utilisation of debts for different clients. Some clients have huge debts, while others have low debts. The low debt is easier to collect in comparison to the huge ones. The company must review its collection strategy systematically if it uses a conservative strategy.A diverse collection strategy will improve the communication process between the collection ad aim at recovering past due accounts. Segmenting the client and developing a relevant collection strategy for each segment will improve the payment behaviour. The collection strategy increases the company’s efficiency and simplifies the client’s payment procedure.

4. Centralised Collection System

A unified collection system will reduce the company’s overall collection process cost.A unified approach will accumulate all the data in one place and help track the delinquent accounts’ records. It prompts the collectors to review accounts, manage profiles, manage call alerts and trigger warning if a problem arises. A centralised system will contain all the information on account receivables that would help search the respective account managers. The company that adopts the centralised system will help them keep their collection cost low and the times for collection at a minimum.

Centralised collection management will improve the call connectivity, customer experience, workflow etc. of the company. A debt collection system with these types of activities will not even reduce the cost but also helps in recovering the amount from the most difficult debtors. This system can help the company to convert their most difficult debtors into valuable customers and increase their settlements.

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5. Maintain client relationships

The collection strategies shall also involve maintaining client relationships. Personal communication with the client will help in understanding the problem behind the non-payment of dues and helps in maintaining a good relationship. Many businesses compete to provide diverse credit options to their customers in a competitive world. Due to fewer financial resources in the hands of the customers, it becomes hard for the company to fit the requirement of the relevant customers. This necessitates the company to maintain healthy client relationships that would help them operate in the long run. Conventional collection strategy often forces the customers to divide into different segments and agents for each category.

6. Complaint processing system

A complaint processing system should manage all inquiries, complaints and disputes in one place. If the disputes are not resolved effectively, they will cause significant problems that harm the consumer relationship and the company’s reputation. As a result, atimely resolution system must be in place under the collection strategies to ensure that the disputes are identified early and resolved effectively and efficiently.

7. Hiring Debt Collection Service

The company shall opt for a debt collection service agent if they have many account receivables. Hiring a debt collection service would reduce the company’s efforts and help them aching their daily business objectives. The debt collections service will aim to recover debts from unpaid invoices in less time and maintain the client relationship. The debt recovery agent will protect the interests of the business and the consumer so that the company will not lose their valuable customers. Before hiring a debt collection service, the company shall ensure transparency in every step of the collection process because if a dispute arises, the company shall be able to resolve the issue effectively.

Conclusion

The debt collection process is time-consuming and requires a lot of effort. Hence, the company must adopt a more systematic approach to the collection process and, at the same time, maintain client relationships. The company shall choose diverse collection strategies to mitigate the risk and provide a holistic approach to its debt collection process. The company shall aim to reduce the delinquent accounts in their financial statements to ensure that there shall be continuous cash flow. Therefore, the company shall choose collection strategies best suit their business activities.

Read our Article: A Strategic Approach to Optimise Creditors’ Cost: Management of Payables

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