Collection procedure: Overview, definition, and example
What is collection procedure?
Collection procedure refers to the steps a business takes to collect money that is owed—usually from customers, clients, or debtors. It covers everything from sending payment reminders to charging late fees, and eventually taking legal action if necessary.
In simple terms, it’s your company’s game plan for getting paid when someone hasn’t paid their invoice on time.
Why is collection procedure important?
Getting paid on time is critical for cash flow—especially for small and mid-sized businesses. A clear collection procedure helps you stay organized, professional, and consistent when dealing with overdue payments. It also shows customers you take payment terms seriously.
Without a collection procedure, you might miss follow-ups, delay action, or treat customers unfairly—leading to financial losses or damaged relationships. Having a documented process also protects your business if you need to escalate the matter to collections or court.
Understanding collection procedure through an example
Let’s say your marketing agency finishes a project for a client and sends a $5,000 invoice due in 30 days. Here's how your collection procedure might work:
- Day 31: You send a polite email reminder.
- Day 40: You follow up with a phone call and offer a payment plan.
- Day 50: You apply a 2% late fee, as outlined in your contract.
- Day 60: You send a final notice and warn of escalation.
- Day 75: You turn the account over to a collections agency or begin legal proceedings.
Because you followed a clear procedure, each step is documented and consistent—making it easier to enforce your rights and recover the debt.
An example of a collection procedure clause
Here’s how a collection procedure clause might appear in a service or sales agreement:
“In the event of non-payment within the agreed payment terms, the Company shall initiate its standard collection procedure, which may include reminder notices, late fees, and referral to a third-party collection agency. The Client shall be responsible for all reasonable costs of collection, including legal fees, if applicable.”
Conclusion
Collection procedure is about getting paid—clearly, fairly, and consistently. It keeps your business financially healthy and helps prevent overdue accounts from falling through the cracks.
Whether you're invoicing clients, selling goods, or offering services, having a solid collection procedure gives you confidence, saves time, and helps maintain professional relationships—even when payments are delayed.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.