In some cases, you may decide it's simply not financially viable to pursue a low-balance debt, particularly as many debt collection agencies will charge a set handling fee for debts under a certain amount. However, in other cases it can be a matter of principle rather than straightforward economics.
The key issue is how important the debt – and the debtor – are to your business. Remember, it may not be just about the significance of this one particular transaction. There are other factors to take into consideration...
Do low-value transactions drive your turnover?
For many businesses which deal in premium products or services, an invoice value of £100 or less may be exceptional. However, there are many companies who rely on multiple low-value orders to make up the bulk of their revenue.
If small amounts account for the majority of your turnover, it makes sense to have a more stringent credit control policy in terms of order value. After all, there's no good reason to write off one small debt rather than another. Even following a strategy of ignoring a percentage of overdue invoices could be a slippery slope that severely limits your cash flow and impacts the financial stability of your business.
Is your reputation at risk?
If word gets around that you're prepared to write off small debts, you could not only look like a soft touch for unscrupulous buyers, it could also reflect negatively on your reputation and professionalism. Imagine if you found out that a company you were buying from didn't bother to insist on payment from another of their customers for the same goods or services supplied. You could feel like you're subsidising other people who get things for nothing and that the company doesn't really value you as a customer.
Is the debtor a one-off buyer or a regular customer?
Writing off an unpaid debt usually means never dealing with that customer again. That's fine if it was simply a one-off purchase. But what if you have an established relationship with the customer and were relying on them making regular purchases in the future?
It's always worth bearing in mind that, just because a customer defaults on one debt, it doesn't necessarily make them a future credit risk. They may simply be experiencing temporary cash flow or liquidity problems. That's why chasing the debt could be a better way to go. You may find that the debt is settled relatively promptly and that the trading relationship hasn't been irretrievably damaged. You may be able to negotiate pro forma or cash on delivery payments in future, rather than continuing to trade on a credit basis.
Can you recover collection costs?
If the debtor is a business, under the Late Payment of Commercial Debts (Interest) Act you can charge them interest on an overdue debt, as well as recovery costs of up to £40 for debts of up to £999.99.
It's worth making sure you include this in your terms of business, so that the customer is aware of the risk of incurring these charges. It might even deter them from late payment.
No job too small
At Redwood Collections, we can chase a debt of any size. However, recovering smaller debts can be just as difficult (or in some cases even more difficult) than recovering larger sums, mainly because debtors often take it for granted that a small debt will be too costly to recover and will simply be written off. That's why, for any debts under £500, we charge a fixed handling fee of £50.
It's always important to weigh up the pros and cons of chasing a low-value overdue debt, and we're always happy to give you any advice or guidance you need. Remember, as well as our standard Collections service, we offer our service for high-volume debt, Collections+. Our flexible, tailored approach helps your business Grow Stronger.
Email us at info@redwoodcollections.com.
