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A collection letter is a document that someone writes to collect money owed. It’s usually sent via postal mail or email and can be written in both formal and informal language.
A collection letter is a letter that explains why you are sending in your payment and how much money you will be sending. Collection letters help the company to understand what they should do with your payment. Collection letters can be used as templates, but it is better to write them from scratch. Read more in detail here: collection letter template free.
To provide your consumer formal notice that a debt is owing and past due, you must follow the correct step-by-step approach and use the correct wording when writing a collection letter. Before employing a collection agency or recording a bad debt expenditure, you should normally send four letters.
Templates for Collection Letters
Collection letters come in four different varieties. Each collection letter template is available for free download below, along with a short description of when you should use it.
Here are four example collection letter templates that you can download for free:
- If you haven’t been able to contact your client by phone and they haven’t replied to the first two letters you’ve written within 14 days after sending the second letter, you should send the third letter by certified mail.
How to Write a Letter of Collection
The procedure of recovering payment on outstanding customer accounts is dreaded by many small company owners. In addition to the free collection letter templates, we’ve provided recommended practices that you may use to reduce the possibility of having to do this on a regular basis.
What Should a Collection Letter Contain?
When drafting a collection letter, you should aim to appear professional while still being tough. You want to demonstrate to your consumer that you are serious about collecting money while still maintaining the connection.
In a collection letter, you should include (or delete) the following information:
- Keep things simple and to the point; avoid jargon.
- Do not handwrite the letter; type it instead.
- Use letterhead from the firm.
- If there are many overdue bills, provide a copy of the invoice(s) or a summary statement.
- Include a particular date by which the account must be brought current (for example, “payment must be received no later than April 17” rather than “payment must be received within seven business days”).
- Include ways of payment that are accepted, such as cheque, credit card, and debit card.
- Information about yourself, such as your phone number, email address, and postal address
- They’ll get a pre-paid envelope so they may conveniently send a check.
Writing a Collection Letter: Dos and Don’ts
At the conclusion of the collection process, you want to accomplish two key objectives: get paid and retain a positive connection with the consumer. Here is a list of some of the do’s and don’ts we propose when seeking to collect on a debt in order to accomplish both of these goals:
In this case, we propose that you do the following:
- Maintain a professional tone.
- Assume that the client will pay.
- Before sending the initial letter, make an effort to contact the consumer.
- Before you send the first letter, send an email.
In this circumstance, you don’t want to perform the following:
- Don’t use abrasive language.
- Customers should not be harassed.
- Customers should not get text messages.
- Don’t use social media sites to communicate.
There are four different types of collection letters.
You will send your client one of four different kinds of collection letters. It’s important to remember that if your customer responds to your phone calls or one of your letters, there’s no need to write another letter until the client fails to pay. The first two collection letter forms are quite mild, whereas the latter two use more harsh language.
The First Letter of Collection
Only send the first collection letter after you’ve attempted to contact the consumer by phone and email. You may send or text a direct link to your payments page if you use a payment solution like Melio to make paying your invoice even quicker and simpler.
You should send the first collection letter if the consumer has not made payment arrangements with you after you have contacted them by phone and email. This should be no later than 14 days after the invoice is due.
Download and adapt our free first collection letter template to match your individual requirements. Make sure to print your letter on corporate letterhead, which should contain your firm logo and postal address.
The Second Letter of Collection
A phone contact should be made before sending a second collection letter to check whether the first letter was received and if the consumer would want to make payment arrangements. If you haven’t been able to contact the consumer via phone, it’s time to send the second collection letter.
The main difference between the first and second letters is that the first letter will contain the information that you attempted to contact the consumer. Customize this free second collection letter template to match your individual requirements. Make sure this is printed on corporate letterhead with your company logo and postal address.
The Third Letter of Collection
After you’ve sent the second collection letter, call the consumer to see if you can reach them. You must write a third collection letter if the consumer has not made any effort to contact within a few weeks. Download and personalize this free third collection letter template.
You’ll add text in the third letter, similar to the second, informing the client that earlier efforts through letters and phone calls were ineffective, resulting in this third try. I also advise you to submit this letter through certified mail. This will need someone signing for the letter, and it will serve as verification that it was received. If you need to take legal action to recover this debt, you’ll need this sort of paperwork.
The Fourth and Last Letter of Collection
While exceptions may exist, by the fourth collection letter, it should be painfully obvious that your client is either unwilling or unable to pay their debt. This letter will be the most forceful we’ve ever written, yet it will still be professional. This last collection letter, like the third, should be sent by certified mail.
Customize this free fourth and final collection letter template to match your unique requirements.
When is it appropriate to use a collection agency?
If several phone calls and letters to collect on an overdue account fail, you might consider using a collection agency. One thing to bear in mind is that you will not obtain the whole amount due to you after you contact a collection agency. In most cases, collection agencies charge between 25% and 45 percent of the entire amount to be collected. This may or may not be worth contacting a collection agency for, depending on the size of the outstanding debt.
Making the decision to write off the account as a bad debt
If you opt not to use a collection agency and instead cut your losses, you should write the account off as bad debt. At the very least, you’ll be able to claim a tax deduction for the money owing to you.
How to Avoid Payment Collection Problems
If you’ve been in business long enough, you’ll almost certainly come across a customer who won’t pay you. There are a few things you can do to help prevent this from occurring again. You may, for example, provide early payment incentives and do a company credit check to determine a prospective client’s payment history.
Here are a few pointers on how to prevent problems with client payment:
Examine the A/R Aging Report.
One of the most important financial reports to evaluate on a regular basis is the accounts receivable report. It contains information on all overdue client bills, such as the invoice date, amount, due date, and number of days the invoice has been past due.
In most accounting software, such as QuickBooks, you may generate an A/R aging report in a matter of minutes. We teach you how to understand the A/R aging report and what action you should take depending on the age of an invoice in our post on how to manage it.
Terms of Early Payment Discount
Consider giving clients a discount if they pay their bills early. Early payment discounts range from 1% to 5% and are usually only available if paid within 10 days of the invoice date. A large percentage of clients will leap at the opportunity to save a few dollars by paying early. To learn more about how this works, check our Early Payment Discounts page.
Deposits should be requested beforehand.
While it may seem odd at first, requesting a deposit from consumers before providing products and services is more frequent than you would imagine. When a consumer purchases merchandise, for example, they must normally pay in full (including delivery expenses) before the product is delivered. Furthermore, most law and accountancy companies demand a retainer before providing services to their customers.
If any (or all) of the following criteria present, I suggest that you always seek a deposit:
- Clients that are brand new
- Projects worth a lot of money (amount will vary depending on the type of business)
- Projects lasting longer than 30 days
Consider the case of a graphic designer who has a new customer who requires a new website and logo design. This project is expected to take roughly six weeks to complete, according to the graphic designer. Because this job will take more than one month to complete and may take much longer, I propose that a 50% deposit be paid up ahead. This guarantees that if the buyer changes his or her mind or refuses to pay after the project is completed, the graphic designer will only be out around half of the total cost of the project.
Before a debt becomes past due, take action.
One of the most common blunders is failing to follow up on payments in a timely way. Unfortunately, many company owners put off asking for payment for far too long since it is such a tough task. Consider utilizing Melio to aid with accounts receivable.
Melio allows you to create a simple payment page with a personalized URL to share with consumers. At least two to three days before the due date, I suggest sending an email with a link to the URL. You may even send the link to your customer through SMS or chat if you have many touchpoints with them.
Remember that these reminders are not a substitute for making phone calls or mailing collection letters. It’s just another tactic to attempt to collect money before a customer’s account goes into default.
Run a credit check on your company
You may perform a credit check on a prospective client’s company credit profile, including payment history with trade partners, in the same way you do for your personal credit score. Knowing how successfully a client has fulfilled their payment responsibilities in the past might help you predict whether or not you’ll get paid. One reporting institution that collects this data is Dun & Bradstreet.
A Dun & Bradstreet credit report gathers information about firms to determine their overall creditworthiness. You’ll be able to access a client’s or prospective client’s whole payment history with trade partners and financial institutions, including the number of late payments. You’ll be able to see straight immediately how risky it is to provide trade credit to that company or how active you should be in collecting payments.
Go to the Dun & Bradstreet website.
Writing Collection Letters: Frequently Asked Questions (FAQ)
1. Should you do business with your customer again if they ultimately pay you?
The million-dollar question, to which I respond, “it depends.” If you can collect payment before sending the client to an outside collection agency, I believe you should consider doing business with them again, with the stipulation that you will need a deposit up advance.
I would absolutely split ways with a consumer who refused to put down a deposit. If a consumer chooses to pay via a collection agency, I will terminate their account and stop doing business with them. It all comes down to your connection with the consumer and whether or not you want to keep it going.
2. How Do You Choose the Most Appropriate Collection Agency?
Small companies should, according to Rocket Lawyer, consider the following before engaging a collection agency:
- Check the validity of the company.
- Inquire about the agency’s usage of skip tracing.
- Check to see whether the agency is covered by insurance.
- Fees and contingency charges should be compared.
3. What Are Your Recommendations for Managing Accounts Receivable Balances?
We’ve gone over a few recommended practices for managing accounts receivable balances, such as utilizing invoicing software and contacting with customers before their accounts go past due.
If this is an area you avoid like the plague, you might think about paying someone to handle it for you.
4. How Much Does It Cost to Hire a Collection Agency?
Collection agencies are compensated in one of two ways: a fixed charge or a contingency fee. Most of them charge a contingency fee, which means they don’t get paid if the buyer doesn’t pay. Contingency costs might range from 25% to 45 percent of the total amount collected. It depends on a variety of criteria, including the length of time the obligation has been outstanding and the number of efforts you’ve made to collect the bill.
Final Thoughts
We hope that this information has made the process of drafting collection letters a little easier. The main objective is to reduce the need for this by putting some of the best practices we’ve discussed with you into action.
The “sample collection letter during pandemic” is a sample letter that can be used to write a collection letter. It will give you an idea of how the letter should look like and what information it should include.
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