A collection letter is a notification informing a customer of a due payment.
It is sent by different people, especially landlords and business owners, to borrowers and debtors for different purposes. A collection letter informs, inquires, reminds, and warns the debtors of possible legal actions resulting from payment defaults.
A collection letter serves three purposes for the business owner and creditor:
- It informs the debtor of outstanding debt: Late payments demand a form of reminder and information to the defaulter. It highlights that the payment date and the expiry period have passed. It is more of a goodwill message to the defaulter to pay up or face the consequences of a default.
- It initiates payment negotiation: A creditor either renegotiates the payment plan or requests for the payment procedure to commence. If there is to be a renegotiation, a defaulter has to comply with the terms of payment unfailingly to continue business relations between them.
- It initiates the legal process: It is the last stage in the collection letter writing. The letter warns a debtor and defaulter of the legal processes that might arise from the inactivity of the defaulter. It notifies them of the urgency to pay to avoid litigation procedures.
Important Features of a Collection Letter
A good collection letter should have all of these features to achieve the desired effect for a business owner or creditor. The features serve as the guiding principles for writing an efficient collection letter. These are:
Series of letter
A collection letter has to inquire, appeal, and notify debtors about the necessary actions concerning a default. A collection letter is sent in a series with the sole objective of payment compliance.
The objective of collection letters is to spur debtors to pay their debts. They also function as a notification to arrange a new payment procedure.
The sole purpose of a governing principle is to ensure compliance and recovery of debts. It does not prescribe the interaction between sellers and debtors after payment has been made.
Referring to the previous letter
A collection letter is also known as a dunning letter as it is sent as one of the last resort in debt recovery. Dunning letters refer to previous letters written from a business to the debtors.
The threat of legal action
The stage establishes a statute of limitation to recover debts owed by customers. The threat of legal action legalizes debt collection via the judicial system.
Sent through registered post
Collection letters should be sent through registered agencies to keep records and avoid susceptibility to a loss. In addition, this helps the business owner to keep such agencies as witnesses during a legal procedure for debt recovery.
The language of a collection letter should be straight, formal, and friendly. It helps businesses to retain customers’ loyalty before and after debt recovery.
Types of Collection Letters
Collection letters should help a business owner or creditor to maintain a healthy relationship with the debtor, and it helps them get cleared of an outstanding due. Payment signifies the effectiveness of a collection letter. If a creditor or business owner receives no response after initiating a response letter, it is time to rework the collection letter template till there is a reasonable response.
Following are the four types of the collection letter:
The first collection letter
Try to contact debtors before sending the first letter as much as possible. You can do this via phone calls or emails. Include your payment method in the email to give them immediate access to a payment channel.
It can be sent 14 days after the invoice is due for payment. It should be written with a courteous tone to remind the debtor of an overdue payment agreement. Please demonstrate that you know that failure may be due to an oversight, but do not intimate that you doubt their ability to pay. Always use your company’s letter-headed paper to give your letters a formal approach.
The letter may contain a unique sale paragraph that intimates the debtor about their interests. The objective of the particular sale paragraph is to hasten and lure debtors into paying on time. It should be noted that the first contact does not often generate a reaction.
The second collection letter
After the first collection letter, it is sent to confirm the receipt and establish if the debtor would like to arrange a new payment procedure. The difference between the second collection letter and the former is that the second shows an initial contact.
Try as much as possible to contact the person to know if they received the first letter before you send the second collection letter. The call gives them a room to confirm if there would be a new arrangement.
The third collection letter
The process is the same as the second stage. Attempt to reach the debtor before you send the third collection letter.
It can be sent out a few weeks after a second attempt has been made to reach out to the defaulting party. Like the second collection letter, the third collection letter is needed to confirm the receipt of the first messages. It keeps the debtor informed of the expected action. Start sending the letters via courier services to confirm the receipt of the letter.
The fourth and final collection letter
The final collection letter performs almost a similar role to the rest. It is needed to confirm the silence from the debtor’s end. It is, therefore, necessary to be a bit assertive and professional with the language choice.
It is recommended that a business owner adopts a recognized mail system to analyze the debtor’s reaction to the email.
How to Write a Collection Letter
Writing a collection letter requires adequate attention, patience, and dedication. A typical collection letter has to state the objectives and position of a business to the defaulting party to help them understand the consequences of such actions to the business and the consequences to themselves if the creditor takes a legal route. Therefore, a collection letter should be written clearly. It should demonstrate a direct request and the expected reaction you want from the debtor.
The following components should be a part of the collection letter:
It should be addressed and formatted formally to the debtor. It should carry the creditor or business owner’s address at the top of the page, while the name and address of the defaulting party come directly beneath it.
A collection letter should be written on a company’s letter-headed paper. The paper contains a formal address and contact details of the creditor. This should be followed immediately by the debtor’s contact details to personalize the letter.
The current date of the correspondence should be clearly stated. Also, include a specific date the payment procedure has to be completed. It allows the defaulting party to understand the importance and urgency of the letter.
It should be detailed to generate clarity in the collection letter. The creditor’s and the debtor’s full details, including their names, addresses, and contact details, i.e., their phone numbers and email addresses, should be written in the body of the letter.
Businesses often send multiple letters out at the same time. Therefore, each letter should be addressed to the recipients correctly. Salutations carry the names of the addressed parties. i.e., “Dear Chadwick,” “Dear Eric,” and “Dear Jake” differentiate the three recipients.
The introduction has to be short, direct, and detailed to explain the importance of the letter. It should have a brief highlight of the case and the reason for the origination of the debt leading to the letter.
A good introductory paragraph of a collection letter captures the recipient’s attention if you want to achieve desired results.
The body of the letter is the essential aspect of the message. It is where the most attention should be dedicated to generating the result.
The body should detail the history of the debt, goods purchased, dates purchased, payment deadline, and the request for pending payments.
It should be made clear that you want the payments made at a specific time. You may break it down to allow the debtor payment flexibility.
Include a specific date the amount should be made current. It gives the debtor the sense of urgency required to generate the result.
Include an acceptable payment method to help the debtor make a quick decision. A call to action of this nature ensures that clients pay up on time and avoid procrastinating payments.
The expected action needs to be clearly stated in the closing section of the collection letter. It should be specific with a call to action. It should also indicate a final request warning for a quick and easy resolution.
Also, include your contact information within the closing section of the letter to help the debtor reach out to you. It includes a phone number, email address, and mailing address.
NOTE: A demand letter can be used during a lawsuit by either party. Therefore to avoid unwanted situations, it is advisable to contact your lawyer to draft the letter.
Following are some free templates for you to get a better understanding of the sentence structuring and tone of the letter:
Tips for Writing an Effective Collection Letter
The following tips will help you write an effective letter to defaulters and debtors. The success of a collection process for a business depends on the delivery of each collection letter. Therefore, a collection letter should show concern, detail the need for action on the debtor’s part, and inquire about possible solutions.
The following tips will help you to craft an effective collection letter:
Write in a professional tone
Every form of familiarization should be halted when writing a collection letter. Therefore, the letter representing a business entity must be written professionally to persuade the debtor to pay up, especially those you hoped to continue dealing with.
Enclose in an envelope for payment
Enclosing in an envelope for payment helps in the delivery of the letter. It also helps to formalize the appearance and intent of the letter to the debtor. The letter should include postage that helps debtors to make payments easily.
Keep it brief
Long letters often capture less attention than short letters. Therefore, consider keeping your letters short, direct, and catchy to generate the desired result.
Do’s and Don’ts of Writing a Collection Letter
While writing a collection letter, it is necessary to observe some attributes to stay in tune with the objectives of your letter. You should do and avoid certain things to deliver an effective letter.
- Keep letters professional: Use a company’s letter-headed paper and avoid familiarity.
- Create an impression that you know they can and will pay. This helps you retain your customers’ faith and show them that you empathize with them.
- Attempt to reach out to the debtor before proceeding to send a collection letter. Doing this helps you understand the hindrance and the reason for payment delay
- Send an email too to contact them before initiating a collection letter. It helps you to find out what the problem is with the delay.
- Explain the details of the prices and charges to the debtor. It is necessary to help establish clarity about the particular debt you’re trying to reclaim.
- Consider incentives for them to pay on time. It helps the debtors to make payment decisions. This can be in the form of cashback, coupons, or discounts if they meet certain conditions.
- Refrain from using harsh words. It is not a good business ethic to retain customers.
- Do not harass customers with the tone of the message. Legal threats and every other form of coercion should be avoided to keep the objective of the collection letter in check.
- Avoid contacting them via social media to maintain professionalism. It is necessary to avoid unnecessary familiarization with the debtors.
- Never send text messages to your customers. Text messages are meant for personal relationships.
Ways to Avoid Payment Collection Issues
As a business, it is almost impossible to prevent debts. At the same time, debt prevention is needed to keep the business running. Therefore, try as much as possible to follow these procedures in your daily practices to keep your business in good shape when it comes to debt recovery principles:
Review AR aging report
A business owner needs to understand the top-level view of the expected business income, outstanding debts, and customer adherence to the company’s collection policies to keep the business in a healthy position.
Therefore, an account receivable report should be used by businesses to review all unpaid debts, check invoices, amount, due dates, and the number of dates that debts have run behind schedule.
Offer early discount payment terms
An invoice reduction system allows a debtor to enjoy a discount on outstanding accounts paid before a particular period. It is also known as a prompt payment or cash discount method.
Such discounts can be between 1 percent and 5 percent and would usually be requested between 10 days to the invoice date.
Request deposits upfront
While it provides security against loss to the creditor, it helps them get some working capital. It also improves the business relationship between all the parties involved and keeps your customers leveraged to make payment commitments.
Request deposits on big projects, projects that run for more than 30 days, and new clients.
Be proactive before a debt becomes past due
Send reminders to your customers if you want to increase the chances of getting paid early. It may be about a week or some days to the expiration period.
You can use a service that allows you to send scheduled messages to customers. With this, you can send the email about 2 to 3 days before the due date. Also, note that you can still contact your customers via phone.
Run a business credit check
Confirm every bit of the information about the customer to reduce the risks that come with credit purchases. This should be in credit report history, revenue, and outstanding obligations.
When we run a business credit check, it helps a creditor know which customer has a history of compliance and which customer has a debt history. These are signs for a business transaction to go on with customers.
Frequently Asked Questions
Hire a collection agency for any amount of outstanding debt. Consider hiring a collection agency to boost your collection chances for debts past 90-120 days.
If you cannot contact the debtor, you should consider writing off the account as bad debt. Also, consider a bad debt situation if the defaulting party does not react to your persuasions for more than 90 days.
Late payments affect the cash flow and business productivity of a business. Understanding the reason for late payments will help you to make an informed decision about such customers.
· Consider the return on investment in terms of their recovery record
· Consider their operation jurisdiction.
· Consider the cost of hiring them with your business size
· Consider their collection specialization area
Know the number of accounts receivable that are over 120 days old. There are specific requirements for different departments; therefore, understand your industry to know the required action.
· Maintain an accurate customer data
· Establish precise credit management and approval process
· Establish an effective payment process
· Optimize the collection process in a timely and effective manner
· Hone a cash application process
· Consider short payment terms
· Create a billing dispute resolution process
The fee varies in terms of agency. They usually charge a percentage, and it can go as high as 50 percent of the paid amount. The debt tenure determines the calculation of the percentage.