Collection policy: Overview, definition, and example
What is a collection policy?
A collection policy is a set of guidelines and procedures that a business or organization follows to manage the collection of outstanding debts or payments. It outlines the steps to be taken when customers or clients fail to pay for goods or services provided. A collection policy typically covers how and when to initiate contact with the debtor, what actions to take if payments are not made on time, and the process for escalating the situation if necessary. The policy helps ensure that the business maintains a systematic and consistent approach to collecting overdue payments, minimizing financial losses and preserving customer relationships.
For example, a business might have a collection policy that includes sending reminder notices after 30 days of non-payment, followed by more formal collection actions if the debt remains unpaid for 60 or 90 days.
Why is a collection policy important?
A collection policy is important because it helps businesses maintain cash flow by ensuring that overdue payments are collected in an orderly and timely manner. It provides clear guidelines for employees handling collections, ensuring consistency and fairness in dealing with customers. A well-defined collection policy can also help prevent disputes, minimize bad debt, and improve overall financial management by proactively addressing payment issues before they escalate.
For businesses, a good collection policy helps reduce the risk of financial strain caused by unpaid accounts and enables them to take effective action to recover outstanding funds. For customers, it ensures that expectations for payment are clear and that they understand the process if they fail to pay on time.
Understanding collection policy through an example
Imagine a company that sells office supplies to businesses. The company's collection policy stipulates that payment is due within 30 days of delivery. If a customer does not pay within 30 days, the company sends a friendly reminder. If payment is still not received within 60 days, the company escalates the process by contacting the customer by phone to discuss the overdue payment. If the payment is not received within 90 days, the company may hand the debt over to a collection agency.
In another example, a law firm has a collection policy that requires clients to pay retainer fees upfront before services are provided. If a client’s balance remains unpaid after the service has been rendered, the law firm will send multiple reminders at 30, 60, and 90-day intervals. If payment is not made after 90 days, the law firm may initiate legal action to recover the fees.
Example of a collection policy clause
Here’s how a collection policy clause might appear in a business agreement:
“Payment for all invoices is due within 30 days of the invoice date. If payment is not received within 30 days, the Company will send a reminder notice. After 60 days, the Company will contact the Customer by phone to discuss the outstanding balance. If payment is not made within 90 days, the account may be referred to a collection agency, and the Customer will be responsible for any additional collection costs.”
Conclusion
A collection policy is a key component of a business’s financial management strategy. It ensures that payments are collected in a structured, consistent manner and helps mitigate the risk of bad debt. By providing clear guidelines for handling overdue payments, businesses can maintain positive relationships with customers while ensuring that they are paid for their goods or services. A well-crafted collection policy supports timely cash flow, minimizes disputes, and contributes to the overall financial health of the business.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.