Hiring a debt collection agency – when and how to do it, and what are your options?

When a customer consistently fails to pay, you may reach a point where hiring a debt collection agency becomes necessary. But what exactly does such an agency do? And are there more customer-friendly alternatives?
In this article, you’ll learn when it’s advisable to hire a debt collection agency, the steps involved, alternative solutions, and why with Payt, you often no longer need a collection agency.

Table of Contents:

1. What exactly does a debt collection agency do?
2. When is it advisable to hire a debt collection agency?
3. Step-by-step plan for hiring a debt collection agency
4. What are the alternatives to a debt collection agency?
5. Why Payt is an alternative to hiring a debt collection agency
6. Frequently asked questions about hiring a debt collection agency

What exactly does a debt collection agency do?

A debt collection agency is a company that attempts to collect outstanding invoices on your behalf. Once your own payment reminders and notices have no effect, a debt collection agency can contact the debtor in writing to enforce payment.

A debt collection agency does not have legal powers like a bailiff. They cannot seize assets, issue court summons, or take legal action. If payment still doesn’t occur, you’ll need to engage a solicitor or consider legal proceedings.

When is it advisable to hire a debt collection agency?

Hiring a debt collection agency is not the first step but can be wise when previous attempts to obtain payment have failed. Consider hiring a debt collection agency in the following situations:

• You’ve sent multiple reminders and at least one formal notice, but there’s still no response
• The agreed payment term has been significantly exceeded (e.g., over 30 days)
• The customer no longer responds to emails, phone calls, or letters
• You lack the internal time or capacity to follow up on credit management diligently

Legal requirements for consumers

Under the Consumer Credit Act 1974, if a consumer misses payments, you must issue a default notice giving them at least 14 days to rectify the breach before further action can be taken.
A correct default notice should include:

• The exact amount owed
• Details of how the breach can be remedied
• A clear statement that if the breach is not remedied within the specified period, further action may be taken

If payment still doesn’t occur after this period, you may proceed with further collection efforts or legal action.

Legal requirements for businesses

For business-to-business (B2B) transactions, the Late Payment of Commercial Debts (Interest) Act 1998 allows creditors to charge interest and claim compensation on overdue payments.

While there’s no legal requirement to send a reminder, it’s good practice to:

• Increase the likelihood of voluntary payment
• Demonstrate that you, as a creditor, are acting responsibly
• Provide evidence in any potential legal proceedings

Note: You can only charge statutory interest and compensation if it’s stipulated in your terms and conditions or if you comply with the provisions of the Late Payment of Commercial Debts (Interest) Act 1998.

Tip: Always explicitly agree on interest and costs in your contracts or general terms and conditions. This prevents disputes and strengthens your legal position in case of non-payment.

Step-by-step plan for hiring a debt collection agency

Hiring a debt collection agency is a serious step in the credit management process. By approaching this systematically, you avoid mistakes, comply with legal requirements, and increase the chances of successful collection. Below is a complete step-by-step plan to guide you through the process.

Step 1: Check the invoice and customer details

• Ensure the invoice is complete and accurate (amount, payment term, VAT, customer details)
• Verify that the payment term has indeed been exceeded
• Check if the customer has previously made contact or reported payment issues

Step 2: Send at least one clear payment reminder

• Send a written reminder as soon as the payment term has expired
• Clearly state the outstanding amount, invoice numbers, and a new reasonable term (e.g., 7 days)
• Maintain a professional and friendly tone

Step 3 (for businesses): Send a formal notice

If payment is still outstanding, send a formal notice (also known as a “Letter Before Action”)

Include in the notice:

• That payment is still due
• That legal action may be initiated if payment is not received by a specified date
• That additional costs may be incurred if legal proceedings commence

Step 3 (for consumers): Send a default notice

Under the Consumer Credit Act 1974, issue a default notice giving the consumer at least 14 days to remedy the breach.

This notice must include:

• The amount owed.
• Details of how to remedy the breach.
• A statement of the consequences if the breach is not remedied.

Tip: Send this notice via recorded delivery or email with a read receipt to have proof of delivery.

Step 4: Gather all documentation

Before transferring the case to a debt collection agency, collect all relevant documents:

• Original invoice and any reminders/notices
• The sent default notice (for consumers)
• Email correspondence or other customer communications
• Any agreements or general terms and conditions

Step 5: Choose a debt collection agency

When hiring a debt collection agency, it’s important not to go with the first one you find. You’re entrusting your customer relationships to them. Always seek references, as credit management is delicate work and can impact your company’s reputation.

Step 6: Transfer the case to a debt collection agency

Submit the complete case (digitally or via integration). Make clear agreements about:

• Processing time
• Cost structure
• Reporting and follow-up

Step 7: Remain available or proceed to the next phase

If payment still doesn’t occur, the debt collection agency may advise you to escalate the matter to a:

• Solicitor (for legal steps, such as court proceedings)
• Court enforcement (for enforcing a judgment)

What are the alternatives to a debt collection agency?

Below are three alternatives you can consider instead of a debt collection agency.

Why Payt is an alternative to hiring a debt collection agency

With Payt’s software, you automate reminders, notices, and communication with your debtors. You retain full control over the process while your invoices are paid faster. If your customer still doesn’t pay, you can easily escalate to a debt collection process or even legal proceedings through Payt.

Advantages of Payt over a debt collection agency:

• Faster payments: invoices are paid on average 30% faster
• Time savings: save up to 80% of your time through automation
• Customer-friendly: communication remains professional and transparent
• Control: you decide when to escalate and whether to charge collection costs
• Certified security: ISO 27001-certified data management

Curious about what Payt can do for your business? Download our brochure below.

Frequently asked questions about hiring a debt collection agency