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Business-to-business debt recovery is the collection of past due accounts receivable owed by one business to another. A third party firm that specializes in collecting delinquent debt from business clients is typically hired to manage the process. Also known as commercial debt collection, the distinguishing feature of this type of recovery is that the debt is between two businesses, rather than a business and an individual customer.
Collection firms that handle business-to-business debt recovery do so on a contingent fee basis. The transaction is usually structured so that the firm takes 15-25% of whatever amount the firm manages to recover. This percentage may seem exorbitant, but the time and effort it takes to recover delinquent debt is substantial. Many businesses prefer to pay an outside agent to handle the process rather than spend valuable time away from core business activities.
Tactics employed by commercial debt collectors vary by jurisdiction. Debt collection is often regulated to protect individual consumers, but some of the same laws apply equally to business debtors. Business-to-business debt recovery will typically include initial communications and follow-ups, offers to settle for less than the amount owed, research to locate assets that can be seized, obtaining a judgment in court, credit bureau reporting, and locating debtors that may have skipped the area to avoid the debt.
Commercial debt collection may seem very similar to consumer debt collection, but there are some important differences. Approach is a factor in business-to-business debt recovery. Depending upon how a business is legally organized, the owners are likely to be shielded from individual responsibility for business debts. This means that debt collection is only effective if the owners have a business that they don’t want to abandon. A business with outstanding debt can simply close its doors or file for bankruptcy, and the owner can go and set up another business doing the same thing and free of old debt.
It can be particularly difficult to recover debts from businesses with nothing to lose, but it can be easier to collect debts from businesses with valuable reputations, roots in the community where it operates, and multiple business relationships. Successful business-to-business debt recovery is predicated on the creditworthiness of the debtor and the debtor’s desire to stay in business. Many businesses rely on credit terms from vendors to manage inventory and cash flow. The commercial debt collector is often not legally prevented from contacting the business’ other vendors, unlike in a business-to-consumer collection, and making it known that the business is not paying its bills. If the business has too many creditors, they can team up and force the business into involuntary reorganization or bankruptcy.
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