What is the Difference Between Consumer and Commercial Debt Collection?

Consumer versus Commercial Debt Collection

For a business to run efficiently and to earn profits in a consistent manner, it is critical that it has adequate liquidity and financial resources on call. Businesses often face challenges despite their skilled financial planning not because of their inability to maintain the right amount of liquidity or capital to support their needs, but because money that is tied up with third parties and owed to them is not forthcoming at the expected time.

The unfortunate fact is that every business needs to have financial transactions with third parties, and a good number of these involve transactions where the business is the creditor, that is, there are dues pending to the business. In fact, extended credit through a credit policy is often offered to long standing customers and other third party associates (such as distributors and sellers) as an indication of the trust and goodwill that is shared between the two parties.

There are times when this trust is abused by the debtors who take unfair advantage of the privilege and fail to make payment on time. There is no difference between consumer and commercial debt collection, when it comes to the need to place them high on your list of priorities.

The impact of long pending debts

Your business is significantly impacted by your debts, in particular, the long pending ones. Look at it this way, you make your business plan on the basis of the liquidity position and capital availability that you expect to have at any given time. If you have receivables due to come in at summer time when it is peak demand season for your fashion business, you may be earmarking these funds to increase your raw material inventory.

Now, if these debtors fail to pay you in time, you’ll have a fund shortage on your hands that may prevent you from buying the materials or equipment you need. As a result, you may face two kinds of problems:

One, you have to take a loan to make up for the funds shortage and that means you business costs are going up thanks to the interest. Two, you may not be able to afford a new loan which means you compromise on production quantity and fail to optimize your sales during your peak selling season.

Either way, your business stands to lose big and that’s something you want to avoid at all costs. However, overdue debts are an inevitable part of any business scenario and you will be having some debtors who fail to pay on time, and some who fail to pay at all. You may have to invest a whole lot of time and effort in managing these long overdue payments, following up with the debtors and keeping a communication channel open with them etc. Also do not that even with every safe guard in place and despite your best efforts, there will be some debts that are beyond your capabilities to retrieve.

Remember that overdue debts represent capital or funds for your business that is locked up and it makes a great deal of business sense for you to hand over this challenging, time consuming task to professionals who have expertise in managing them. This is where debt collection attorneys play a key role in helping your business retain its competitive edge in the marketplace.

Two kinds of debts

When it comes to the detrimental impact on your business, there is no difference between consumer and commercial debt collection and how it is critical to speed up the process to safeguard your business. Business owners often overlook the fact that they can have two kinds of debts- from consumers or end users and from their business associates.

The consumer debt may arise from various transactions. Maybe, a frequent customer gets a credit period from the business based on the long standing relationship he has with you. Or, you may be giving a new customer a chance to try out your product for free for a limited period, purchase it after the time limit, if he is satisfied or return it, if not. This is a more likely scenario for you to end up with overdue payments because you don’t really know how reliable the consumer is. However, if your niche is highly competitive, you may need to take on the additional risk with such ‘deals’. In effect, all dues pending to you from your buyers or end users come under consumer debt.

Commercial debt covers all the dues pending to you from other businesses. You have several relationships and contracts with other businesses who help you take your products to the marketplace and to the consumer’s shopping carts. Almost all of these involve financial transactions too and there is a scope for overdue debts with any of these business partners or associates. For example, your distributor has yet to pay you for your last consignment of products or your retailer network has dues. A business that has hired you to design and manufacture uniforms for employees has received your consignment but not made payment yet. There are innumerable instance of how businesses can become your debtors with significant commercial debts due to you.

An interesting point to note here is that dues from a sole proprietorship to your business are still commercial debts and not consumer debts even though the business may be owned and operated only by one individual. Debts to a sole proprietorship are commercial debts too because both of these are made by the individual in his capacity as a business owner.

Now, your business may have both kinds of debts to be collected and this is where is becomes necessary for to understand the difference between consumer and commercial debt collection.

The legal perspective

There are laws to protect both businesses and consumers and both these impact your ability to collect your dues. To begin with, you need to understand that the law is designed to protect the rights of both debtors and creditors and ensure that fair and equitable treatment is meted out to all. This can pose some challenges for you when collecting your debts and again, this is one of the most critical reasons why you need experienced debt collectors handling the task for you. You do not want to overstep the boundaries of law in your haste to get your money back. In the eyes of the law there is a difference between consumer and commercial debt collection and this difference influences the legal treatment given to either kind.

Consumer debt collection is generally governed by far stricter laws than commercial debts. The protection afforded to a consumer, say an end user of your product, may be substantially more than the protection given to a commercial debtor of yours.

To make it simpler, your end user may be able to claim that he ‘misunderstood the terms and conditions’ and even get away with it. If the same excuse is used by a business debtor of yours, they may be asked to pay up because the onus of correctly and accurately understanding terms and conditions lies more heavily on commercial outfits than individuals.

Now, let’s move on to the biggest difference between consumer and commercial debt collection: the FDCPA.

What you should know about FDCPA

The FDCPA or Fair Debt Collection Practices Act is administered by the FTC or U.S. Federal Trade Commission and the CFPB or U.S. Consumer Financial protection Bureau. This Act governs the processes and mechanisms that can be used in consumer debt collection. However, a key point to note is that law firms are exempted from this act, which means that by hiring competent attorneys to carry out your consumer debt collection, you may be making the whole complex task far easier on yourself and your business.

Law firms are required to follow specific rules (such as getting permission from the debtor for contacting him) in pursuing the debt collection process, though. There is a lot of ambiguity in what can and cannot be done in consumer debt collection and an experienced attorney is your best ally in ensuring that your chances of recovering funds without breaking the law are highest.

The main objective of the FDCPA is to protect creditors from abusive collection activities that debtors may resort to. The idea is to provide a platform to creditors where they can present their side of the case and ensure that unfair practices are not used to recover the dues. For a business like yours that has consumer debts pending, this can make the complex debt recovery process even more challenging and high risk.

A collection attorney with extensive knowledge of the FDCPA Act and its many implications is the best person to guide you through this potential legal minefield. In fact, it is not wrong to say that, if you are dealing with substantial consumer debts, it is best to avoid handling it on your own and best to leave it to collection attorneys who are aware of both federal and state laws pertaining to such debts.


Commercial debt collection

Commercial debts or business to business debts are also an inevitable part of every business’ financials. The key point to remember here is that the FDCPA does not govern the debt collection with these kinds of dues. The concept followed by the law makes is that businesses have the option to call in experts to guide them on their rights and responsibilities with respect to debt repayment or debt management.

There is really no need to safeguard a business that has dues towards another business because this is, after all, a commercial transaction like any other that either business should be equipped to deal with on their own.

Given that the legal framework is more flexible with commercial debt collection, the success of collection endeavors lies more heavily with the collection agent. Hiring a highly skilled and experienced collector improves your chances of a successful recovery quite substantially.

One factor to consider with commercial debt collection is that the attorney should try to avoid destroying the relationship between the creditor business and debtor business. This is a very difficult outcome to achieve but one that works in favor of both parties if continuing their business relationship is best for both of them.

In commercial debt collection, the collection attorney should also consider the current status of the debtor business. If they have shut shop and liquidated the company, the debt may be considered as a consumer debt. No matter what the circumstances of the case, it is very important that your debt collection attorney has a complete and thorough understanding of all the prevailing laws that are pertinent to these issues.

Does the difference between consumer and commercial debt collection impact rate of success?

Not really, but the specifics of the particular case do impact the possibility of a successful collection process. For example, if a commercial debt is long overdue and the business that owes you the debt has closed down and the owners have gone missing, the chances of recovering your money in full is low. The success you may have with a defaulting commercial debtor who has substantial business property is far higher.

Similarly, a consumer who owes you a small amount may not warrant your investment in a long winded debt recovery process and writing it off may be the more viable option. However, if the sum is substantial, then hiring an attorney who is well versed with the FDCPA and its limitations is a worthwhile option.

There is no way to categorize either kind of debt as easy or difficult to recover. It all depends on the facts of individual case and the expertise of your debt collectors. After all, you do want to ensure that your debt collection endeavors are all done within the boundaries of law, so that you and your business are safe guarded from potential litigation from your debtors, which may lead to damages claims or other financial losses.

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