What’s a worthwhile minimum amount for debt recovery?

As a debt recovery company, TCM Belgium is often asked what minimum sum makes a recovery effort worthwhile. Is it cost-effective for a phone service provider to recovera debtof €20 or €45? Should a clinic bother instructing a debt recovery company to collect an unpaid debt of €400?

The creditor’s choice

If invoices of less than €100 are the exception for your company, the non-payment of one or two of them isn’t going to threaten your business. It would indeed be useful to try and obtain payment, but it’s not a strategic issue. However, if small invoices make up the critical mass of your turnover, finding a solution is paramount. This very much applies to water, gas, electricity and phone companies, as well as to many vendors of other goods and services. Recovering these small debts is made all the more important by the fact that word gets around. If I find out that my neighbour hasn’t been paying their bills to Company X, where I’m also a client, and also that there’s been no backlash for them, I’d feel like I’d been a bit of a mug paying and I’d be inclined to also default on my debts to creditor X. This can best be described as the debtor domino effect.

Are smaller debts easier or more difficult to recover?

Some debtors argue that a creditor is less likely to put a lot of effort into recovering €20 or even €80, as the recovery costs could very well exceed the amount of the debt. This has the paradoxical effect of making the recovery of small debts harder than the recoveryof amounts between €1,000 and €5,000. Therefore, the smaller the amount owed, the harder we have to work to recover it. The graph below shows that at TCM (where we make efforts to recover all debts, even small ones), the easier bracket is €50 to €150, even though in theory from €10 to €50 should be more straightforward to recover.    

The cost of recovering a small debt

‘No cure, no pay’. This payment principle itself provides part of the solution, as regardless of the amount of an unpaid invoice, the creditor only pays for the recovery company’s service when the latter actually succeeds in recovering the amount owed. Therefore, there’s no risk for the creditor and no advantage in the debt recovery company incurring disproportionate costs. With this system, the cost of recovery is a percentage that will be deducted from the recovered amount. This rate is then agreed between the creditor and the recovery firm before recovery efforts are commenced, depending on the estimated cost and the probability of recovery (based on the statistics). It will be higher on small amounts, as recovering €50 costs almost as much as recovering €500.

Cutting the costs of recovering a small debt

By adapting yourgeneral terms and conditions, you can pass on part of the recovery cost to the person or company which generates this cost, most notably with a fixed charge. Since you’ll have gathered, a recovery attempt can be made on any debt, although the relative cost of recovering a small debt is higher. However, one economic reality needs to be weighed against another, namely the risks associated with not trying to recover amounts because they are small. Contact us for a service tailored to your needs.