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Collection & Recovery

What Is Collection & Recovery?

All businesses experience the challenge of having to collect past due payments from customers. The process of attempting to gather past due payments is referred to as collection and recovery.

Collection and recovery are strongly related, and they refer to very similar processes. However, there is one very important distinction. Collection refers to the process of a business attempting to collect on debts owed by its customers. In contrast, recovery refers to the process of a third-party attempting to collect money owed to another creditor or business.

How Is Collection & Recovery Performed?

Generally speaking, collection and recovery start from the same place. Most businesses extend credit to their customers. Of course, lending institutions are in the business of making loans, but other types of businesses, from manufacturers to retailers, also extend credit to their customers.

Extending credit builds good will and trust, and it expands the potential customer pool by increasing the range of payment options.

In an ideal world, all customers will pay in full and on time, but in reality, this does not happen. At some point, bills go unpaid. Businesses have a process for managing unpaid bills. Initially, transactions that are made on credit, meaning full payment is not made right away, are recorded as accounts receivable (AR).

Recording a transaction as an account receivable does not mean it is past due. It merely means that credit was extended to the customer in some form, and payment is expected in the future, most likely in installments and in a few months. Accounts receivable are typically collected in two months or less.

Businesses have systems and process to manage AR to encourage payments on time and in full. Accounting automation software, proper invoicing, and good credit policies, for example, are all designed to minimize bad debt, or past due payments.

Beyond these steps, which lay the foundation for good AR collections, the business will also want to evaluate its AR by creating what is known as an aging report. An aging report will provide the business with a snapshot of the status of all its accounts receivable.

The aging report organizes individual accounts receivable into groups depending on how much they are past due. The typical groupings are:

  • 0-30 days

  • 31-60 days

  • 61-90 days

  • More than 90 days

The status of each group reflects the time that has elapsed since an invoice was issued to the customer. The aging report will help the business organize and evaluate the status of its accounts receivable.

Collection Process

Once a business has evaluated its AR, it can implement a strategy for collections. AR teams use dunning letters to collect on overdue receivables and prevent accounts from going delinquent. A dunning letter is a collection notice sent to a customer explaining that a payment they owe is overdue. They help the business communicate with its customers and prevent delinquent accounts.

Recovery Process

At some point, if the business determines that a debt is not collectible, it will move to the phase of recovery. In this phase, the business will enlist the help of a collections agency to collect the debt.

From the consumer’s point-of-view, this is significant because the delinquent payment will now be reported to the credit bureaus or credit agencies, which will impact the customer’s credit score.

Collections agencies have their own process for pursuing debt. They will reach out to the customer to confirm identity. Then they will try to set up payments. If no arrangement can be reached, the debtor of the collection agency may pursue legal action to collect on the debt.

As creditors, businesses have different relationships with collectors. In some instances, they will sell the debt to the collector, in which case, the business that originated the unpaid transaction no longer has any pecuniary interest in its collection.

In other instances, the collector has not purchased the debt from the business and is acting on its behalf as its representative. If the collector is acting on the business’s behalf it is not authorized to reach any sort of settlement, or to take legal action against the customer without the business’s approval.

FAQ

Why Is Collection & Recovery Important?

In the modern business world, customers and businesses have a wide range of options for payment. Businesses indulge these various payment methods because they create new possibilities to expand their range of customers. Similarly, customers like having a range of payment options because it gives them more flexibility as consumers.

Unfortunately, not all customers are reliable, and uncollected payments are a reality in today’s business world, even with the many new methods of paying for transactions. Businesses need to manage their collections and recovery as effectively as they will manage other aspects of their financial operations.

Having an effective collections and recovery process will minimize uncollected debt and the impact this can have on the business’s cash flow, which ultimately affects its ability to operate and perform in a competitive environment.

BlackLine Collections Management

Request a demo and see how collections management with BlackLine reduces days sales outstanding (DSO), improves the prioritization of customer calls, and watch productivity rise with smarter, collection management processes.