While we’re not technically in a global recession yet, the figures are not looking particularly promising. The World Bank has already stated that most countries are heading for a recession by the end of the year, with a rate of global growth slowing from 5.7% in 2021 to 2.9% in 2022.
There are many things to blame here - continued strict lockdowns in China, the war in Ukraine and the subsequent energy price hikes, the cost of living crisis in Europe, and countless famines and food crises in developing countries. It all continues to stalk the economy as it limply tries to recover from the strain of the pandemic and financial markets are already taking note.
The MSCI world index of equities has fallen more than 18% since a peak in early January and it continues to plummet as we begin to experience the return of something that hasn’t really been seen since the 1970s - “stagflation.” This refers to an economic phenomenon where the economy slows down as inflation rises. It’s a “worst of both worlds” scenario and it’s knocking on our door as we speak.
In such an environment individuals and businesses are undoubtedly going to suffer and that suffrage will invariably end up being passed on to their lenders. Indeed, in times of recession, lending rates often soar but there’s every chance many of these new debtors simply won’t be able to pay their debts.
So, how are lenders to guarantee they don’t end up taking on more bad debt than they can handle?
The EXUS Financial Suite is a complete and scalable credit and debt management solution
Solidify your contracts and applications
This might sound like an obvious piece of advice but you would be surprised how many deals are still made on a handshake with very little documentation. You must ensure you have an iron-clad contract in place that is as comprehensive as possible and acts as legal proof of the debt. Whether in making collection calls, in court, or in the hands of a debt collection agency, that contract needs to be well-researched, well-written, and flexible, as if the project scope or deliverables change, amendments will need to be made.
When it comes to taking on new customers, meanwhile, lenders are going to need to start showing restraint. All potential customers must be required to complete a thorough credit application, which will allow you to not only assess their performance as a debtor in the past but analyse their potential for repayment in the future. If the vetting process turns up any red flags, they might not be the right fit for you. Thankfully, the technology exists that allows lenders to automate this process, though going over certain potential customers with a fine-tooth comb might sometimes be required.
Develop a late payments procedure
During a recession, businesses routinely go under, and not only does this lead to problems for their owners but for their employees too. This means not only a problem for lenders when it comes to taking on new customers but problems with existing customers too, many of whom might not be used to dealing with bad debt. That’s why you must have a firm late payments policy and procedure in place. This procedure will depend very much on the business or individual in question.
Traditional logic was to send a reminder email and follow-up call when payment was past due, a second possibly a week later and a written warning before the matter was potentially turned over to a debt collection agency. Set a deadline and follow through with your plan until the debts are cleared. If you offer to accept a partial payment, meanwhile, always get the debtor to agree to a specific payment plan until the debt is paid off in full and ensure your next steps are clear in the event of a failed payment.
Read more on the future of debt collections and new trends in customer service
Move fast and don’t accept stall tactics
Those that are able to move and act nimbly are always going to be the ones that succeed. Nobody likes strong-arming debtors into paying up but sometimes it’s an unfortunate necessity. There is an ideal middle ground between being forceful and respectful and that’s all about using the right channels for the right debtors at the right time.
Also, don’t be afraid to get a specialist debt collections agency involved if you have run through all other alternatives. They might find they run into the same problems but they are specialists at resolving debt for a reason. Don’t be afraid to follow through with litigation in the event that the debtor can afford to pay but is refusing. It’s an unpleasant process but it sets a firm precedent.
Make digital transformation a priority
Comfortably the most significant way that collections teams are recession-proof is to invest further in digitally transforming and automating the collections process. Giving your debtors every available opportunity to sort their debts themselves before you have to step in and do it for them is always going to be the best option and digital transformation allows you to do this in several ways.
The EXUS Financial Suite is a debt collection solution that monitors the whole debt cycle and automates the most important routine processes for you, so all of the above can be taken care of without human interference. It utilises a powerful decision-imagine engine based on business rules and analytics and is highly configurable so should be a good fit regardless of your circumstances.
Above all else, however, it’s a way of ensuring the little things are taken care of and don’t add up to a big thing and that allows you to tackle the big things head-on with no distractions. With a recession almost assured in the next 12 months, that’s a very powerful thing to have up your sleeve.
Contact us at EXUS today for more information on how our industry-leading debt collections solutions can help you weather the coming recession