Debt Collection in the Informal Economy

118_1896With the informal economy I refer to doing business without a formally established company or whereby a person does business on its own account without being registered to do business; and / or business is done without or with (very) few and / or insufficient contracts, invoices, order forms, or otherwise official documentation in place.

Now I have always found this a hard nut to crack, debt collection in the informal economy. Perhaps this is less of an issue in North America or Europe (or at least Northern Europe), but in Latin America and the Caribbean where the size of the informal economy is considerable and where it forms an indispensable way of life, the informal economy is also in the debt collection business part of reality.

But how do you collect debts in if there is no formal basis to rely on? Here are four things to focus on.

1. Commercial relationship

Perhaps there is little to no legal basis to sustain a collection claim. However, in the informal economy, like in formal economy, business is done on the basis of a commercial relationship. In order to determine your chances of success in collecting outstanding debts, it is crucial to determine how important the business relationship is or might be in the future to your debtor. And if for your debtor there is still an interest in maintaining or improving the commercial relationship, because your debtor wants to continue doing business with you (as it needs your products or services) there is leverage to collect.

2. Reputation

There might not be a formal business, but your informal debtor may have a commercial reputation in its industry it wants to keep up with. That reputation can be harmed if it becomes known in the business that it defaults on payments. If can trigger your debtor to pay in order for the debtor to keep its reputation in good standing.

3. Financial resources

Just as in the formal business world, also in the informal economy businesses go through financial ups and downs. The debtor can be in financial tough waters, but may still be committed to pay its debts. if this is the case, the approach should be to be realistic, patient and solution-minded and settle amicably for a payment plan with monthly installments or, perhaps even look for one time settlement payoff. you will the end be (at least partially) compensated for the outstanding debt, the commercial relationship may be saved, and debtor is given the opportunity to sort out and solve its financial problems.

4. Solving disagreements

Perhaps the reason debtor is not paying is a dispute or disagreement regarding commercial and / or financial terms. The less is put on paper, the more room for interpretation of business terms, and the more likely it is that there will be disagreement, disputes, and renegotiations on the way. Quality issues, problems with delivered materials, service level performance issues, different interpretation of terms, differences in business culture or languages, it can all contribute to default on payments. Again, the approach should be solution-minded. Try to negotiate settlement payments in combination with re-establishing the commercial terms and dealing with the outstanding issues. Perhaps this is a good moment to put as much on paper as possible to avoid similar issues in the future…

Debt collection in the informal economy might not be on the basis of potential legal support of the claim. However, debt collection in the informal economy can be effective by focusing on the following: the importance of the commercial relationship, reputation of the debtor, financial resources on your debtor’s end and solving disagreements between the parties.

If you are interested in learning more on the subject of debt collection in the informal economy let’s connect on Linked-In or follow me on Twitter.

To participate in conversations about debt collection in Latin America please join the Linked-In Group Debt Collection Latin America.

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