Debt collection letter

For the past three months, Amy has been chasing payment for floral arrangements she supplied to an events management company. She’s emailed her customer a number of payment reminders and received a brief ‘promise to pay’ reply. Still, the money hasn’t arrived. Her phone calls ring out and as a busy small business owner, she can’t afford to lose any more hours chasing this account. She’s beyond frustrated and now very worried that she’ll never be able to recover the $2630 she’s owed. “Send a debt collection letter,” suggests a friend.

A debt collection letter, also known as a letter of demand, or a dunning letter, notifies a customer in writing that they are overdue in paying an account, and stipulates the sender’s expectation of payment. A debt collection letter usually follows a series of failed attempts by the creditor to contact their debtor with reminders to pay. Considered a more formal follow-up, the debt collection letter is typically sent on the creditor’s letterhead or on a third party letterhead (e.g. from a debt collection agency). “If the letter comes on a third party letterhead, debtors tend to pay attention and are typically more influenced to pay,” says Eddie Smith, debt recovery specialist from Australian Recoveries & Mercantile Agents.

Before you send a debt collection letter

Before sending a debt collection letter, make the effort to find out the root cause of non-payment. Phone your customer and work on resolving any disputed invoices. Send payment reminders with copies of the overdue invoices and give your customer reasonable time to respond. At this stage, you might agree on a payment plan if your customer is experiencing cash flow problems. Your internal efforts should follow a disciplined and systematic approach with the aim of making a collection as soon as possible.

The right time to send a debt collection letter

As an invoice ages, the cash becomes harder to recover, and the probability of making a collection decreases. “The right time to send a debt collection letter is when your other internal efforts to recover the debt have been unsuccessful,” says Eddie. Once you’ve tried to reach your debtor with email or sms reminders and phone calls, without success, sending a debt collection letter is a sensible next step.

In Eddie’s experience, businesses used to reach the 90-day mark before sending a debt collection letter, but the trend is changing. “It’s more common that businesses want to send a debt collection letter within 60 days, as they understand it’s about getting paid as quickly as possible. They move through their internal efforts more efficiently, then outsource if they need to.”

debt collection letter

It’s harder to make a collection as invoices age

Still, some businesses sit on overdue debts for far too long. “Small businesses can get personally attached to the debt and sincerely believe their customer will eventually pay—the ‘she’ll be right’ attitude. Bigger businesses don’t do that. For them, it’s about getting paid,” says Eddie.

When a small business owner realises how simple and effective it is to send a demand letter, “they wish they had done it sooner,” says Eddie.

As days overdue lengthen, it can be harder to recover the debt, even for the professionals. “Your debtor’s financial situation can change over time, they might cease trading, and their contact details can change,” says Eddie. In most Australian states, invoices that are more than six years old are considered Statute Barred i.e. they are no longer legally enforceable due to the period of time that has elapsed since the debt was first issued.

Key features of an effective debt collection letter

Lay out your debt collection letter on your letterhead or if you have engaged a debt collection or legal firm, they will send the letter on their letterhead. A letterhead contains relevant contact details, including an address and phone number for the business seeking the collection.

It’s important your letter is dated as evidence of when you tried to contact your debtor.

Debtor’s correct address
Make efforts to find the current listed business address for your debtor. Debt collection firms use a number of data sources to locate debtors.

After your polite salutation, make it clear this is a letter of demand by stating ‘Letter of Demand from <your business name>’.

Details of the debt
Clearly state the details of the debt owing:

  • total amount owing
  • invoice number/s,
  • due date
  • the goods or services provided
  • any late penalties that have accrued (if documented in your customer’s signed contract)
  • the name of the person who signed the order with your business.

For your debtor’s reference, you can attach copies of invoices and your signed contract that includes payment terms and conditions.

Details of attempts to contact debtor
Remind your debtor of your previous attempts to contact them about the debt. You can refer to the dates you sent emails or left a phone message.

State your expectation of payment
State your expectation of payment within your desired time period. For example, ‘Please be advised that I demand payment in full for the amount of <insert amount> within seven days of the date of this letter.’

Include payment methods
Advise your debtor of your accepted payment methods e.g. bank account for deposits, details to send a cheque, or include a link to your online payment gateway.

Honestly advise your debtor of your next intended action if they don’t complete the payment. As a creditor, you are not allowed to misrepresent action that you do not intend to take i.e. do not suggest legal action will follow if this is not your intention. However, you can ‘reserve the right to take legal action without further notice to you.’

After a polite closing, e.g. ‘Yours sincerely,’  include your signature, name and title in your sign-off.

Eddie advises creditors to make the letter succinct, keep a copy of it, and send it via registered mail so you get proof of delivery.

And being firm but reasonable in tone is important, too. When Eddie communicates on behalf of creditors, he understands the debt collection letter is an opportunity to save the customer relationship and resolve the issue in a positive way. “We aim to work out a solution for our client that maps a way forward for them and their debtor.”

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