What is a demand letter?A demand letter typically follows a series of failed attempts by the creditor to collect the money owed to them by their debtor. You can generate your own demand letter or you can pay a debt collection agency to send one on your behalf.
When to send a demand letter to collect a debt?Imagine you’re the gift wholesaler, ABC Wholesalers. You’ve supplied your retail customer, XYZ Shopfront with $10,000 worth of goods on credit. The due date was 35 days ago, and since then you’ve sent a few emails to remind them to pay. Despite their promise to pay, the money has not arrived. You’d like to retain XYZ Shopfront as a customer but you can no longer afford to carry this debt. You decide it’s time to take more serious action and send a demand letter. Send a demand letter when:
- You’ve sent payment reminders and made phone calls without getting a response from your customer.
- Your customer promised to pay but the money never arrived.
- You want to remind your customer of their payment obligations under your trade credit agreement.
- You want to give your customer another opportunity to pay their invoice before you commence legal action.
How to write a letter of demand: advice from a debt recovery specialistAt ezyCollect, we partner with debt collection agencies who can help our users to send a demand letter easily. Our partners have a track record of using positive collection techniques to help businesses recover ageing commercial debts. We asked Eddie Smith, debt recovery specialist from Australian Recoveries & Mercantile Agents (ARMA), for his advice on the best way to write and send a demand letter. “A demand letter notifies a customer in writing that they are overdue in paying an account, and stipulates the sender’s expectation of payment. The letter of demand can be sent on the creditor’s letterhead or if it arrives on a third party letterhead, debtors tend to pay attention and are typically more influenced to pay,” advises Eddie.
Things to remember before you send a demand letterEddie’s advice is to make the effort to find out the root cause of non-payment before you send a demand letter.
- Phone your customer and work on resolving any disputed invoices.
- Send payment reminders (usually via email) with copies of the overdue invoices attached. Give your customer reasonable time to respond.
- Consider allowing your debtor to pay off their debt in instalments if they are experiencing cashflow problems. (Pay by Instalments is a standard payment offer in ezyCollect’s online payment solution.)
The right time to send a demand letter for overdue payment“The right time to send a demand letter is when your other internal efforts to recover the debt have been unsuccessful,” advises Eddie. “Once you’ve tried to reach your debtor with email or SMS reminders and phone calls, without success, sending a demand letter is a sensible next step.” In Eddie’s experience, businesses used to reach the 90-day mark (the invoice is overdue by 90 days) before sending a demand letter, but the trend is changing. “It’s more common that businesses want to send a demand letter within 60 days, as they understand it’s about getting paid as quickly as possible. They move through their internal efforts more efficiently, then outsource if they need to.” Still, some businesses sit on overdue debts for far too long. “Small businesses can get personally attached to the debt and sincerely believe their customer will eventually pay—the ‘she’ll be right’ attitude. Bigger businesses don’t do that. For them, it’s about getting paid,” says Eddie. Even the professionals find it harder to recover money as overdue days increase. “Your debtor’s financial situation can change over time, they might cease trading, and their contact details can change,” says Eddie. In most Australian states, invoices that are more than six years old are considered Statute Barred i.e. they are no longer legally enforceable due to the period of time that has elapsed since the debt was first issued.
Demand letter must-haves:Eddie advises creditors to write a succinct letter, keep a copy of it, and send it via registered mail for proof of delivery. Letterhead Lay out your demand letter on your letterhead or if you have engaged a debt collection or legal firm, they will send the letter of demand on their letterhead. A letterhead contains relevant contact details, including an address and phone number for the business seeking the collection. Date It’s important that your letter is dated as evidence of when you tried to contact your debtor. Debtor’s correct address Make efforts to find the current listed business address for your debtor. Debt collection firms use a number of data sources to locate debtors. Title After your polite salutation, make it clear this is a letter of demand by stating ‘Letter of Demand from <company name> ’.
What to include in writing a strong demand letter for paymentDetails of the debt Clearly state the details of the debt owing:
- Total amount owing
- Invoice number/s
- Due date/s
- Details of the goods or services provided
- Any late penalties that have accrued (if documented in your customer’s signed contract)
- The name of the person who signed the order with your business.
A note on tone when writing a letter to demand payment of debtBeing firm but reasonable in tone is important, says Eddie. When Eddie communicates on behalf of creditors, he understands the debt collection letter is an opportunity to save the customer relationship and resolve the issue in a positive way. “We aim to work out a solution for our client that maps a way forward for them and their debtor.”
Key takeaways in writing a debt recovery letter of demand:
- Add a demand letter to your collection sequence. Send it when you need to take more serious action to recover unpaid invoices.
- The demand letter clearly articulates your payment expectations.
- Include all relevant invoice details and attach invoice copies.
- Document your previous attempts to collect.
- Remind your customers of the terms and conditions of your trade agreement.
- Do not misrepresent your intended action.
- The demand letter is an opportunity to recover the money in full or part, and save the customer relationship.
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