Extrajudicial debt collection
Do you have some customers who are not proceeding with payment in spite of all precautions, calls and reminder letters? Going to the court for judicial debt collection is expensive and time-consuming. Additionally, it would be the final blow to an already tense customer relation. How about trying the extrajudicial process first. A neutral third party often achieves good results, allowing you to receive your money while retaining your customer.
Please note! Different rules and customs apply to extrajudicial debt collection for B2B (between companies) or B2C (between a business and a consumer). A private individual has more extensive legal protection against claimants.
This page relates only to extrajudicial debt collection in a B2B issue.
What does extrajudicial debt collection mean?
Have you not succeeded in ensuring the customer’s payment of its unpaid invoices by its due date? Do you lack the time, staff or expertise to continually remind the customer of its payment obligation? Then call in a neutral third party. A receivables manager or debt collection agency will attempt to collect payment for your outstanding invoices without recourse to the court. You fully outsource collection of the invoice payment. The debt collector is fully authorised to make the necessary steps on your behalf.
In fact, the debt collection agency has the same options as you do in collecting the payment outstanding. However, having the time and expertise to stay on the ball, it has a higher probability of succeeding in collecting the amount payable.
There is a difference with a judicial or legal debt collection process as completed by a bailiff. The bailiff acts based on a court order or executable deed. The bailiff has more instruments, for example sequestration of the customer’s possessions. Please consider that the procedure will be longer, more expensive and will fully disrupt the relationship with your customer.
When to decide on extrajudicial debt collection?
You do not need to proceed with extrajudicial debt collection immediately on the due date. Complete the following steps:
- Unless you have made other agreements with your customer, the invoice is due after 30 days.
- If you receive no payment in that period, it is best to immediately remind the customer of its payment obligation.
- If the customer does not respond to your reminders (telephone calls or letters), or does not fulfil its payment obligations, you send a reminder by registered letter. This is your customer’s last chance for showing good will.
- If the customer still has not reacted, chances of getting a result yourself are slim. Your soft approach is not effective. The effect and your credibility are at stake if you make another attempt.
- The best thing is to call in the experts. Your customer then understands that you do not allow for cat and mouse games.
Whatever you do, do not let unpaid invoices lie if you have completed the reminder process.
Which invoices are eligible for extrajudicial debt collection?
In principle, all invoices for goods, expenses and fees are eligible after the due date. You may also mark up the invoices with interest for payment past due and the mark-up clause as set out in your General Terms and Conditions. Please consider the following issues:
- The claim should be undisputed. This means that the customer has not made any provisos, for example due to late or incomplete delivery, or non-compliant goods.
- If you found out that the customer is bankrupt, has disappeared or requested suspension of payment (‘WCO’), extrajudicial debt collection is not useful.
- Determine whether the company is unable or unwilling to pay.
In the case of a company that is not able to pay, you are unlikely to achieve short-term success. Threatening with legal steps is probably not effective as the customer is likely to be juggling various claimants. In such a case, judicial debt collection will mainly be focusing on concluding a payment plan. The debt collection agency will closely monitor this payment plan.
In most cases, however, companies are not willing to pay. The company has funds, but not enough to pay all suppliers on the due date. The main suppliers will be prioritised. Pointing out to such a company that late payment will have consequences to their credit rating in the Graydon database (with all ensuing implications) is often very effective. Continuing to urge the customer and staying on the ball will ensure that at the very least, your invoice is not at the bottom of the pile.
- Even for small invoices, judicial debt collection is often justified. The cost of legal debt collection usually runs up quickly.
- Do not hesitate to decide on judicial debt collection for larger amounts receivable, in particular if it affects your own company’s cash flow.
- If you want to maintain the trading relations with the customer, judicial debt collection also works as a buffer. The customer-friendly approach will keep your relationship intact.
If you decide on involving a debt collection agency, then at least provide the following details:
- The invoice number and date, amount due and due date.
- The mark-ups and interest as set out in your General Terms and Conditions.
- The preceding customer communications.
The debt collection agency will then follow up payment through repeated reminders by letter, email and telephone.
What are the benefits of judicial debt collection?
- A debt collection agency has expertise: They use powerful reminder letters that urge the customer to pay. The employees are specifically trained in such debt collection correspondence and talks, which are often challenging. They understand how to deal with excuses and apply the right balance between encouragement and threat.
- Specialised software ensures automated reminder procedures. This way, no case will slip through loopholes, and they stay on the ball with reminders in writing and telephone calls. This ensures maximum efficiency.
- You prevent the list of invoices outstanding to run up and you avoid a threatening working capital deficit.
- You maintain the trading relationship with the customer in spite of temporary payment problems.
- A debt collection agency has the same pressure instruments that you have. However, Graydon has additional aces up its sleeve. It can rely on its business database. This immediately provides insight into the customer’s financial situation and Graydon is then able to adjust the measures accordingly. Customers will be inclined to pay Graydon quicker to avoid being flagged in its database.
- If payment is still not forthcoming, the debt collection agency can advise you about a legal process. In legal debt collection, the solicitor is then immediately informed of the full case file. Based on all evidence, the court will declare your claim founded.
Which fees should be taken into account?
The claimant incurs a financial cost for extrajudicial debt collection for B2B claims:
- Most debt collection agencies take over case files based on a commission on the amount collected. They often apply a no cure no pay concept. If extrajudicial debt collection does not lead to a result, you do not need to pay anything.
- Debt collection agencies will increase the amount payable by your customer gradually based on fees and interest. These are not their fees; this concerns the penalty clause as set out in your General Terms and Conditions. This allows for partial recovery of the commission you pay to the debt collection firm.
The older the invoice, the more difficult it will prove to collect
Timing is crucial. The longer an invoice is overdue, the more efforts it will cost and the more difficult it becomes to recover the amount due.