Wondering if it’s time to hire a collection agency? We often think of collection agencies in terms of the consumer market. For example, retail stores and credit card companies often hire a collection agency when their customers don’t pay their bills. However, professional debt collectors also work on behalf of B2B companies, such as transportation companies, manufacturers, accounting firms, and other professional service providers. So, if your business is plagued with delinquent accounts, it might be time for you to bring in a professional too.
What is a Collection Agency?
A debt collection agency, sometimes referred to as a debt recovery agency, is used by creditors or lenders to recover past-due receivables or accounts that have defaulted. As a business owner, you might fit the criteria for being a creditor simply because you invoice clients after you’ve delivered goods or services.
Why Hire a Collection Agency?
It’s essential to manage your account receivables processes in a way that ensures your clients pay promptly, your business profits, and your cash flow is strong. Unfortunately, however, sometimes clients don’t pay despite best efforts. Considering just half of all small businesses only make it five years, per the Small Business Administration (SBA), and most failures can be traced back to cash flow issues, collecting what you’re owed is vital to the survival of your business.
But why outsource your debt collections instead of simply writing off the debt or continuing to pursue it internally? Let’s take a quick look at some of the benefits.
1. Resources and Expertise
Delinquent payments are a major problem for businesses. In the business services sector, for example, more than a quarter of payments are overdue, per Dun & Bradstreet’s latest report. Industries like trucking and manufacturing are roughly the same. Most tell a similar story, though a whopping 22 of the 228 industry segments studied report more than 10 percent of their past-due accounts are greater than 90 days overdue.
That’s worrisome by itself, but the longer a payment remains outstanding, the less likely the business is to collect. On the payment due date, around 95 percent of commercial debts are collectible, per the Commercial Collection Agency Association (CCAA). At 30 days overdue, collection rates drop to 90 percent. At 60 days, collectability drops to 81 percent. At 90 days, there’s less than a 70 percent chance you’ll collect.
Time is everything when it comes to unpaid receivables. Specialized debt recovery agencies are focused on collection, so professionals put forth extensive efforts and leverage tactics business owners might otherwise overlook. For example, they may use skip tracing to locate non-responsive debtors. Credit reporting is helpful too. Because the debtor’s credit score impacts the business’s viability, many will take care of an unpaid invoice promptly to avoid taking a hit. Legal action may be taken as well.
2. No Collection, No Fee Service
Many professional debt collection agencies have rules that state they don’t get paid unless they collect. So, if you’ve already exhausted your internal debt collection process, moving to a third-party agency makes financial sense. You may pay a fee on any recovered funds, but you’re still receiving a payment you otherwise wouldn’t have.
3. Legal Protection
There are countless regulations that govern debt collection practices, all the way from federal to state laws. They vary dramatically depending on your industry and debtors too. Because collection agencies are well versed in these laws and have policies in place to ensure compliance, hiring a professional can protect you from legal risks.
Additionally, companies that hire a collection agency have a paper trail of their attempts to collect and how the debtor responded. This information from the collection service can prove invaluable if the case ever goes to court and may also help you recover fees. It’s also beneficial for write-offs of bad debts, as you need proof the debt is “worthless” to claim a tax deduction, according to IRS guidelines.
4. Saves You Time
The average small business spends 14 hours per week chasing payments, according to a recent QuickBooks survey. In similar studies, the agency found that 56 percent of business owners performed this tedious work outside their normal working hours, taking away from personal time that’s vital for work/ life balance. With professional debt collection services, you simply forward the account to your agency, and they handle all the heavy lifting, giving you and your employees all that time back.
5. Keep Your Customer
Customers with overdue accounts aren’t necessarily “bad” clients. They may have hit a financial snag or simply overlooked your invoice. That’s no reason to throw away a longstanding and lucrative relationship.
The good news is collection agencies aren’t all about strongarm tactics. There’s a high degree of flexibility within the industry. Depending on your arrangement with your agency and the services they provide, you may be able to tap into an acceleration program rather than traditional debt collection. In these cases, the agency starts with firm reminders and instructions for making good on payment, thus freeing you from hours spent chasing while increasing the odds of payment and maintaining your business relationship.
Picking the Right Collection Agency
The debt collection industry is massive, so you have lots of choices in who to hire. As you explore your options, keep the following in mind:
- A contingency-based agency only charges you when they collect. Going this route can save you money.
- Fees and services vary greatly from one debt collector to the next, so compare fees, but don’t necessarily shop for the lowest price.
- Reputation matters. Work with someone who will treat your customers well, as their service is a reflection of you.
- Find out their typical recovery rate but remember that an unusually high or low recovery rate could be at the cost of service.
- Choose a specialist—someone who routinely serves your industry and understands your clients.
Accelerate Payments Through Invoice Factoring
Invoice factoring is not an alternative to hiring a collection agency, but it can help your business accelerate cash flow by collecting your receivables faster. Moreover, factoring companies like Charter Capital will run credit checks on your clients prior to extending credit, thus reducing the risk of non-payment. Because of this, many businesses that use factoring negate the need for third-party collections, but it can also work alongside it to keep your cash flow strong. To learn more, request a complimentary rate quote from Charter Capital.