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How do you maximise debt recovery in a recession?

When the economy is flatlining or contracting, it can be a challenging time if you’re a creditor. But is it a boom time for debt collection agencies?

GDP was negative in the second two quarters of 2023, taking the UK economy into recession. Although there are signs that the recession will be shallow, real growth in the economy is expected to be low for some time.

There’s no doubt that an economic downturn increases risks for creditors. Businesses facing cash flow issues may be forced to delay payment to suppliers, or may not be able to pay at all. With businesses going bust, people lose their jobs, meaning they can struggle to meet their personal liabilities, putting more pressure on struggling businesses. It’s a vicious circle that can quickly turn into a downward spiral.

Is a recession good news for debt collection agencies?

It’s a common belief that tough times for businesses means good times for the debt collection industry. However, that is a myth.

Just because there’s more overdue debt to deal with, doesn’t mean recovery rates always go up. In fact, with a rise in businesses insolvencies, they can often go down. Good debt collection agencies focus on consistently delivering great service, whatever the economic situation.

Survival of the fittest

During a recession, it’s even more important to be diligent with debt collection. So, how do you avoid dragging your business down with overdue debt? Here are some tips to strengthen your debt collection processes:

Act fast

There’s a lot of evidence to show that, the longer you wait to chase an overdue debt, the less the likelihood of a successful resolution. Make sure you have robust credit control processes in place, including issuing reminders as soon as the payment deadline is getting close.

Stay in touch

It’s vital to make direct contact with the customer to find out why the debt isn’t being settled. It could be something simple, such as a lost invoice or an outstanding query. If you can’t get in touch with the key decision maker, maybe it’s time to take things to the next level.

Businesses with cash flow problems often prioritise payments to certain creditors. By staying in close contact with the debtor, you can make sure you’re at the front of the queue.

Be flexible

Why not offer the customer a payment plan? If their cash flow issues are temporary, it’s an option which won’t damage your future trading relationship. It’s better to get paid in instalments than not at all. It’s also better than taking legal action, which can be time consuming and doesn’t guarantee you’ll get paid everything you’re owed.

An alternative is to negotiate a barter arrangement, also known as a contra deal. If the debtor has a product or service that you can use, you could accept it in lieu of all or part of the debt. In two-way trading relationships, there’s also the option of set-off: an accounting procedure in which you credit part or all of the debtor's account against the amount you owe them.

Take care with new customers

When the economic going gets tough, you need to be super-careful about taking on new debt. Carry out robust credit checks and, if there’s any obvious level of unacceptable risk, trade on pro forma terms until the customer proves themselves to be creditworthy.

You should also make sure your terms of business are well drafted, setting out clear payment terms and covering you in the event of late payment or debt default. It should also include procedures for dealing with invoice queries or disputes as quickly as possible.

Still struggling with debt recovery? Trust the experts

If your efforts to recover a debt are not paying off or you simply don’t have the time or resources to deal with debt collection effectively, it’s time to get professional help.

At Redwood Collections, we have a strong record of success, even during tough economic conditions. Having our expertise and reliable support on your side can be a real asset and could make all the difference when you’re struggling to get a debtor to respond. With our help you can reduce the risk of a crippling recessionary debt burden and keep your business on track to Grow Stronger.

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