Debt Collection Made Simple

Apart from death and paying taxes, there is one more guarantee in life… collecting debts. And for so many businesses in South Africa, this is getting harder and less successful with each day passing and this pandemic hanging over our heads.

Collection Options

There are various options in collecting debts, each with its own advantages and disadvantages.

Some of these options include:

  • Internal Soft Collection;
  • External Soft Collection;
  • Litigation;
  • Liquidation / Sequestration.

Internal Soft Collection

This is the most cost-effective procedure and involves one of your employees demanding payment from the debtor, either over the telephone, in an email or a letter of demand.

Internal collection, when successful, can give your cash-flow a quick boost and preserve the future business relationship with the client.

Unfortunately, difficult debtors are usually not moved by internal collection and will continue to delay or avoid payment of their debts.

External Soft Collection

Soft collection by a debt collector or attorney removes the emotion from debt collection, and debtors usually take this form of collection more seriously. Unfortunately, external collection will cost you a percentage of the debt successfully collected.

From experience, we find no significant benefit of external debt collection over internal debt collection. When debtors are difficult, they may not even fold under the pressure of a stranger.

External collection can also destroy the trust relationship between the parties and a continued business relationship may be affected.


Litigation is when you take your guns out and sue the debtor for payment of the monies owed. This is the most effective debt collection procedure, but it is not without disadvantages.

The disadvantages of litigation are:

  • It is expensive (usually). Not all attorneys offer a Litigation Retainer, and without an affordable alternative, like a Litigation Retainer, litigation can be quite expensive. For debts below R50 000.00, the litigation costs can exceed the debt itself.
  • A future business relationship is improbable. Although a non-paying client is not a worthy client, if you cannot afford to lose the client despite outstanding debts, then litigation might not be the right option.
  • Time-Consuming. The Litigation process is governed by a set of rules and procedures, with specific timelines. This can become frustrating during the debt collection process.
  • Inherent Risks. Litigation, just like routine medical procedures, has inherent risks. The outcome of litigation can only be predicted, but never guaranteed.

Liquidation / Sequestration

Liquidation is not and should not be used as a debt collection procedure. Liquidation should be a “last resort” procedure when all else failed. Liquidation brings and end to a debtor, a liquidator is appointed, all the debtor’s assets are sold and then distributed to the creditors in relation to their ranking.

The threat of liquidation proceedings is sometimes all that is needed to force a debtor to pay, but even this cannot be guaranteed.

Keep in mind that even a threat of liquidation will tarnish any possible future business relationship. But then again, if you have to go as far as threatening with liquidation proceedings to collect outstanding debts, that client is not worth keeping.

Companies and Close Corporations are liquidated, while individuals and partnerships are sequestrated. We only mentioned liquidation, but the principles are the same for sequestration of individuals and partnerships.

Reducing the Risk of Bad Debts

Doing business before getting paid is a risky business. There are several ways to minimise the risk of non-payment and debts becoming bad.

Suretyships are well-known forms of security for debts. But despite popular belief, suretyships are not the one and only answer. Suretyships are usually provided by the directors of a company, but for small businesses, the company’s financial position is usually a reflection of the financial position of the director. If the company is unable to pay its debts, the director is usually faced with the same fate.

Another alternative is to request cession of book debts. Any trading company in financial distress, is usually in that financial predicament because of a number of debtors owing it money. By taking cession of such debts, you can pursue a claim against such debtors, collect it and recover your debts.

Mitigating the risk of bad debts are not fool proof, and the risk of non-payment can never be eliminated by a suretyship, cession of debts, pledge, mortgage bond, or other forms of security.

Eliminating Risks

The best debt collection procedure is to avoid being owed any money. This might sound counterintuitive, but keep reading.

When you adopt the mindset of “show me the money”, you can eliminate the risk of not being paid.

This can be done in several ways, including:

  • Requesting a sufficient deposit before commencing the work. If a client is not good for a deposit, it will not be good for an invoice.
  • Making use of “Trust Services” or more commonly referred to as escrow services.

Deposits are usually only part-payment and does not eliminate the risk of non-payment of the balance, but at least it can prevent a loss.

Trust Services on the other hand, secures payment of the full amount before work is commenced or goods are delivered, and once the work is done or the goods are delivered, the payment is released. If the work is not done or the goods are not delivered, the payment is refunded.

Attorneys all have a trust account and handle payments on behalf of other parties on a daily basis. Speak to your attorney about Trust Services and the costs involved. For some unknown reason, escrow services are not very popular in South Africa. Perhaps if it were, debt collection would have been a much smaller industry.

There are a few escrow services out there, with competitive pricing. However, disputes between a service provider and a client or between a buyer and seller are inevitable. When a dispute arises, you would rather want an attorney resolve the dispute for you than a transactional company that is only interested in finalising the transaction to recover their fees.