What are the Steps Involved in Effective Collection Procedure?

Collection Procedure

Collections of credit are a very important part of the credit management process as it is the final part of the initiative. By collecting the dues, a lender completes the cycle of credit management. Since collecting the dues is the sole reason for granting credit, firms must know how to proceed with the collection process from individual customers or firms.

It is, therefore, obvious that lenders or credit-grantor companies must have a well-structured plan for the collection of dues.

Steps Involved in Effective Collection Procedure

Following are the steps for the lenders to collect the dues from the borrowers −

Issuing a reminder

Lenders should ideally issue a reminder well in advance to remind the borrowers about the due date of payment. The reminder should usually be sent before the first installment of payment by the borrowers. This reminder should include the information about the due, such as amount in each installment, the number of installments to be paid, and the amount of each installment.

Some lenders also include the interest rate in the reminders to keep the borrowers aware of the real interest that must be added to the principal amount.

Writing a polite letter to derive the dues

If the borrower does not pay even after reminders of the due dates of payment, the lenders can write a plight letter to the borrowers requesting the latter to clear the dues. This should act as a second reminder of the dues unpaid by the borrower.

Furthermore, the lenders can include all details of the loan in the letter to make the borrower aware of the unpaid dues mentioning the interest rates and principal amounts owed by the borrower. In the modern era, the initial letter is issued along with an email to the borrower to initiate the process of payback of the loan.

Taking a hard stand in the next letter

If the borrower does not initiate payment even after the polite letter, lenders may write a strong-worded letter to push the borrower to pay the dues. This letter may include the warning of legal actions the firm would initiate if the dues are not paid by the borrower. The lenders must inform the borrower of the possible outcomes of non-payment and try to instill the initiative of prompt payment via this letter. The letter may be addressed to the original address of the borrower.

Lenders also initiate the process of hard action with a warning via such a letter.

Initiating collection warnings via other media

If the borrower does not respond to the strong-worded letter, the lenders may start the process of pressuring the borrower by using telephones, and telegrams.

The idea is to force the borrower to pay the dues as soon as possible. If the borrower still does not pay the dues, the firms that have lent the money should start taking real, physical steps to recover the loans.

Visiting the representative

When none of the above-mentioned steps work, the lenders should visit the representatives of the borrower. This should suffice to allow the borrower to pay the loan back. Such a visit can also reveal the financial condition of the borrower.

Taking legal actions

When none of the stands seem to work out, lenders may take legal action against the borrowers. This may include seizing the assets and making payments from the borrower’s account to the lender legally.

Lenders must, however, check the financial condition of the borrower before taking legal action. If the condition of the borrower is weak, legal action will only fasten the borrower’s insolvency without bearing any fruit for the lender.

Conclusion

Usually, the rules for different borrowers should not be the same; however, the lenders can follow the above mentioned steps to recover the money when the borrower does not pay the dues in time.