What is third-party debt collection?

Facing nonpayment from trading partners? Third-party debt collection may help.

Nonpayment is a challenge that exporting companies may commonly experience. Whether due to a language difference or the insolvency of a trading partner, unpaid invoices can be a sizeable thorn in your business' side.

But, an unpaid bill is not necessarily the end of the road third-party debt collection gives your business an opportunity to secure the reimbursement you are owed for goods or services rendered.

The phrase "debt collection" itself may provoke an unsavoury response for some, but in reality debt collection is a closely regulated process. When you pursue debt collection in the correct manner, like through a specialised organisation, it might allow you to recover revenue or otherwise argue your case in court.

To help clear up some misconceptions, let's examine the concept of third-party debt collection and best practices.

Intro to third-party debt collection

First, let's establish a definition for debt collection. According to the Australian Competition & Consumer Commission (ACCC), debt collection is the process of creditors seeking to recover payment that is legally owed to them. This may occur as a result of nonpayment for goods or services, whether rendered to a consumer or another business.

Third-party debt collection is simply the practice of outsourcing the debt collection process to a specialised organisation.

If your exporting business experiences nonpayment, you might opt to bring in a third-party collector. This entity operates on your behalf to resolve the situation between your business (the first party) and the buyer (the second party), essentially handling all communications and legal proceedings that your company would otherwise be responsible for.

Why hire a third party?

Debt collection can be a complex and highly involved process. It also requires extensive experience in order to ensure the highest level of efficiency and effectiveness. For those reasons alone, it makes sense to consider leveraging the services of a third-party collector.

Exporting businesses may face other particular challenges that make third-party outsourcing an advantage:

  • Resource limitations: For the most part, businesses don't have the benefit of in-house employees who are dedicated to debt collection. So when you do need to recover payments or take legal recourse, it takes away time and money from your internal teams. Third-party collection allows you to focus on your core operations.
  • Lack of expertise: There are many regulations that govern how the debt collection process plays out. Ultimately, you may need to take legal action. The niche nature of debt collection can be extremely difficult for internal employees to handle, which may negatively impact your rates of success or legal challenges.
  • No physical foreign market presence: Exporting businesses that are chasing payments from international buyers may encounter a number of hurdles related to culture, business customs or language barriers. Without specialised in-house talent that is familiar with each foreign market, it can be especially difficult to contact and negotiate with debtors or initiate legal challenges.

What is and isn't allowed in third-party debt collection?

Fairness is hugely important to debt collection, which itself is tightly regulated. There are several stipulations jointly set out by the ACCC and Australian Securities and Investments Commission (ASIC). Many rules have to do with how creditors conduct themselves throughout the course of proceedings.

For example, a collector (whether you or a third party) may only contact the debtor if they have a reasonable purpose. Allowable interactions include:

  • Conveying a demand for payment.
  • Explaining the consequences of nonpayment, including legal remedies.
  • Giving the debtor information about their account.
  • Making arrangements for repayment of a debt.
  • Proposing a payment schedule, alternative payment or settlement.
  • Reviewing existing arrangements after an agreed period.
  • Asking for clarification as to why earlier contact attempts were not answered within a reasonable period, or why the debtor has not complied with an agreed-upon repayment arrangement.

Intimidating, harassing or otherwise pressuring debtors is strictly forbidden. It is illegal to:

  • Use physical force or coercion.
  • Hassle the debtor to an unreasonable extent.
  • Mislead or deceive the debtor.
  • Take unfair advantage of a vulnerability, disability or other adverse circumstance affecting the debtor.

You can read the full ACCC/ASIC guide on allowable debt collection behaviour here.

How to find a reputable provider

Before you outsource your debt collection needs, you must be sure that the provider is not only high-performing but also ethical. Working with a collection service that uses questionable tactics can damage your own reputation, as well as lead to potential legal issues.

When vetting third-party collectors, pay attention to whether they:

  • Commit to an amicable process: It's vital you ensure that the provider adheres to established best practices and regulations when pursuing payment from your debtors. Ideally, the provider has an existing workflow that includes exhaustion of all amicable options before resorting to legal actions.
  • Will coordinate legal proceedings: Many debt disputes end up in court, which can strain your resources. A provider that initiates and monitors legal proceedings, as well as acts as a general liaison between your legal representatives, is a big benefit to the continuity of your business operations.
  • Empower you in the process: Even if you hand off collections to a third party, your business will still have an important part to play. Be sure that providers offer tools and systems that allow you to efficiently participate in the process and keep apprised of where collections stand.

Why choose Coface?

Coface, a leading provider for exporting companies, maintains debt collection services in more than 100 countries, employing more than 330 debt collection specialists and 100 lawyers and bailiffs.

Our resources and vast experience can give you a high-performing, cost-effective alternative to pursuing debt collections on your own. Our database of 65 million companies across the world helps us to analyse payment behaviours and build a strategy for payment recovery.

Reach out today to learn more about Coface third-party debt collection services.