Collections: managing financial hardship and rising interest rates

No one can predict the future. Unexpected situations and incidents can cause financial stress for those that may be living paycheck to paycheck or, as a result of such incidents, can’t afford to repay a debt by the due date. 
Collections: managing financial hardship and rising interest rates | Probe CX

What causes financial hardship?

Consider what’s happening in the market today. The inflation rate for June 2021 in Australia was 6.1%. This is the highest recorded rate of inflation for Australia since 2009. In September 2022, inflation hit 7.3% and the Reserve Bank of Australia is forecasting inflation to hit 7.75% by the end of the year. An above-average inflation rate has significant effects on business operations, future plans and their overall ability to meet financial debts.

On top of inflation increases, we are also seeing a rise in interest rates and the household debt-to-assets ratio is set to increase to 18.2%. Gone are the days of generous pandemic-focused government financial assistance packages. 

Other causes of financial difficulties for customers could be sickness, natural disasters, unemployment or even over-commitment. These more personal reasons emphasise the point that organisations need to consider taking an empathetic approach to chasing debt.

The importance of effective financial hardship and debt management controls

So what does this all mean for your debt collection teams? The demand for effective debt management controls is increasing. A rise in inflation reduces consumer purchasing powers meaning fewer goods are bought over time resulting in profits decreasing. During this time, your debtors may find themselves less inclined to pay off debts as quickly as they may have previously. On top of this, debtors may actually take on more debt in order to keep themselves and their businesses afloat. In fact, 48% of businesses have had to take on more debt to combat inflation rises in the past.

Ensuring your organisation has an environmental, social and governance (ESG) framework could also help in protecting your debt collection activities. This internal framework outlines how an organisation manages risks, so establishing a component focused on debt collection management processes could prevent further escalation against regulatory governing bodies.

It’s important when chasing debt to keep in mind that there are frameworks and regulatory organisations that dictate the debtor-creditor relationship. Organisations need to do their due diligence and understand these frameworks to ensure they are responsibly chasing debt and not overstepping unlawfully.

Taking proactive instead of reactive steps to manage financial hardship such as understanding the rights of both creditors and debtors outlined by The Australian Competition and Consumer Commission (ACCC) can avoid escalating issues. These issues could involve receiving a dispute from The Australian Financial Complaints Authority (AFCA) on behalf of the debtors.

Organisations need to keep up to date with these financial market influences, such as rising interest rates, to understand whether these external factors could be influencing their debt recovery plans. An added level of sensitivity and empathy may be required to balance a sustainable repayment process with your debtors and what these financial changes might mean for them. Learning to maximise debt recovery and mitigate costs is a must. Efficient debt management control measures can help.

Psychology plays a big part in all this: empathy, understanding, communication and control. The correct mix of these concepts can help you effectively manage these hardships from two ends: managing the debt collection aspect of the debtor-creditor relationship and controlling the effects of delayed funds internally.

How to effectively get your debts paid

So what can you, as a creditor, do to get your debts paid while being mindful of any financial hardship being experienced across your debtors?

Manage the debtor-creditor relationship

Let’s start with your credit and collection teams. These are the people that pick up the phone and make the calls to your debtors. Ensuring efficient credit control processes are distributed amongst your credit and collections teams is a must.

Getting your frontline team members the training they need to control debtor issues while showcasing an understanding of their problems is the first step. In a study by CPP, of the employees that received conflict resolution training, 95% stated the training helped them find positive endings. Providing training opportunities to your collection teams can help them understand how to deal with customers that are highly stressed.

Sourcing the right profile of agents for your debt collection teams is essential. Ensuring your recruitment processes are identifying candidates that have the confidence to handle difficult situations with empathy or have experience in roles that require patience and a level-head means they’ll be able to manage your collections in a cool, calm and collected manner. This will create an atmosphere where your debtors feel comfortable and heard when following up on outstanding debts.

Utilise digital tools

Despite having the right agents trained up, sometimes the reason a debtor may be avoiding physical communication or return phone call is because of the anxiety it can cause them. Investing in technology such as chatbots or virtual agents that have been programmed for debt recovery may be another option to help your creditors get more positive outcomes from these discussions.

Well-maintained systems are a strategic part of the debt management tool kit needed today. Software that can identify lapsed payments or even anticipate the likelihood that a certain debt may not be recovered based on previous interactions can help organisations plan for bad debt allowances.

Establish a financial hardship policy

Be transparent about your hardship programs and controls within your organisation. Proactively releasing information to customers regarding financial hardship and the options available to those experiencing it may improve customer outcomes. Enter a financial hardship policy.

This policy addresses good engagement practices, the need to build an empathetic relationship with customers, and how to effectively identify customers who may be experiencing financial hardship to offer ways to better manage their repayments.

The measures outlined in your financial hardship policy allow your organisation to take a more proactive approach to chase debt in an empathetic manner. Instead of being only reactive and offering support ‘too little too late’, these programs can provide early advice on where to find counselling and financial assistance schemes to avoid escalating debt.

Review credit policies and terms

Start by reviewing your credit policy and the terms behind your business agreements. How clear are your terms of trade? Are the repayment terms obvious? Are there conditions that explain what should happen if a payment is not received? What are the credit limits? Who has the authority to change the conditions?

Make sure to revisit your credit history or conduct financial health checks on your debtors. That way, when deciding if your business wants to offer an extension or credit, you can do so knowing that the debtor has a history of making repayments on time and being reliable. Check-in on their buying habits and just how much they have purchased without paying in full just yet. Look for warning signs that they may be experiencing financial hardships.

Providing accurate information on invoices and statements will protect your business from receiving backlash from your debtors who may use it as an excuse to not pay. Don’t be afraid to include overdue payment warnings on your statements.

Get legal advice from your solicitors. Have them review the terms of trade and identify any areas that could be considered loopholes in debt recovery. You want your credit policies to be airtight so that when you do chase, you’re able to do so confidently.

Avoid customer concentration risks

Customer concentration (handling a large proportion of your business with just one other business) can carry substantial risk, especially if that business starts to fall behind on payments. Be careful handling extended credit requests and the growth of a customer - perhaps place limits on the amount one can purchase without payment in full being received. Over time, once trust is gained, you may offer more leniency with some customers to build a relationship but still continue to do regular health reviews to check-in.

Mitigate hardships through expert assistance

When it comes to frustrations in business, bad debts are high on the list. When are they going to pay? Are they going to pay? What will you do if they don’t pay? Chasing money from customers can be a nightmare for businesses of all sizes.

From the emotional stress of raising the subject to the energy spent writing letters, sending texts and making calls; debt recovery is often a drawn-out process that requires time and energy that could be better spent elsewhere. That’s why many of Australia’s biggest brands turn to expert debt recovery and management solutions to tailor unique collection services to suit their specific needs and challenges.

From the customer experience perspective, having someone else ‘step into the conversation’ also shows people with overdue bills that there has been a clear escalation in proceedings, which tends to have an immediate effect on their motivation to pay.

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