Time to hire a debt collector like DECA?
Not all business owners will be paid for their work, and unfortunately, that’s a trend that has gained traction as our country continues its emergence from one of the worst economic recessions in more than 70 years. While most of the outstanding invoices for U.S. small businesses end up paid, many bills go unpaid for weeks, months, or never at all, leaving small business owners with the uncomfortable and many times ineffective task of internal debt collections.
Though the worst of the recession may be over and the credit markets have stabilized (many public U.S. companies are again establishing their creditworthiness and reporting improved cash flows this year), prevalent demand remains for debt collection services amid the inflated need to address aging account receivable delinquencies. Internal controls and best practices to collect a customer’s payment remains in-house for many small businesses, but there may come times when hiring a professional and effective debt collection agency will be a necessity for small businesses who want to collect.
Many small businesses are forced to write off bad debts, but what if they didn’t have to? Many third-party debt collection agencies, like DECA Financial Services, only charge when a debt is recovered, essentially leaving a company with a percentage of the original outstanding debt. If you’re positive you have aging receivable accounts that will most likely not be recovered by your company, you know it’s time to hire a collection company (the alternative is to let the debt go forever unpaid.)
Here are some industry tips to help small businesses recognize when the right time to hire a debt collection agency has presented itself.
Older invoices often bear less probability of collection
There are clear advantages to companies who develop in-house internal systems for collecting payments, and depending on the industry, company – and buyer – these systems can vary in terms of size, complexity, and of course, efficiency. One of the most obvious advantages is that a small business that’s collecting an outstanding debt has an opportunity to build a stronger, more intimate relationship with that customer while developing long-term prosperity and trust in the process.
Many small business customers’ receivable accounts that are delinquent, however, go unpaid and neglected by the buyer regardless of whatever relationship is established. And the longer a bill has been delinquent, the less likely recovery will be for a company that prefers to internalize their debt collection system over hiring a debt collection agency.
In How to Collect Debts and Still Keep Your Customers, author David Sher confides in this every fact. It’s estimated that for any bill or receivables account that is 30 days past due, the recovery potential is around 97%. As time goes on, that recovery potential dwindles drastically. After 60 days, the potential drops to 80%, and after 180 days, it drops to a mere 40%. Finally, after one year, the probably of recovery is near 0%, indicating the debt should either be written off or passed on to a collection agency.
While considering how and when to determine if a third-party debt collection service like DECA should be hired to collect your company’s outstanding receivables, you’ll want to simply compare the recovery potential (in other words, how long the debt has been delinquent) to the costs of hiring a debt collection agency. If the chances of internal recovery are low and so too are the costs, it makes sense to hire an agency. Keep in mind that the recovery and success rates for debt collection agencies is much higher than the estimations above, which are specifically tied to internal practices of collection among small businesses.
It is important to note that if you have a well written contract that requires the customer to be responsible for all collection and attorney fees, then you can pass those costs on to the customer, thereby making your organization whole. However, this is very difficult when the collection is handled by an internal collection unit as the costs can be difficult to collect and in the event that the matter is escalated to litigation there is a high risk that the court will not award those fees. Thus, an effective collection agency can prove to be much more cost effective to the bottom line than an in-house unit.
Why is the account delinquent?
This tip is much more of a judgment call, a decision that should be made on a case-by-case basis rather than as a generalization for all small businesses who want to collect their outstanding debt. As part of the internal controls for collecting outstanding debts owed by customers, companies want to determine why this debt is outstanding in addition to how long it’s been outstanding.
For example, for a customer who has a long history of making payments on time, sudden and unexpected cash flow issues may be to blame for the unpaid invoice, in which case outsourcing to a debt collection agency may not always be the most compassionate solution. Conversely, a new customer who is in default and has no history with your company carries a much higher risk of non-payment, and in this case, quickly hiring a debt collection agency can make all the difference in whether or not your get paid for your work.
Here’s a good rule of thumb: if you can be sure your invoice has been submitted multiple times and you’re confident the invoice has been reviewed and accepted as accurate and collectable by the customer, using a debt collection agency makes the most sense. Internal or “soft” practices likely won’t work anymore, because at least in this case, you can be confident that the customer is simply refusing to pay your company for the work performed. That is, until you hire a debt collection agency on your company’s behalf.
Debt collection agencies posses skills and tactics that are guaranteed to work
Let’s face it – even companies (especially small businesses) that successfully internalize their debt collection process aren’t in the business of collecting debt, and therefore, face several disadvantages in competing with debt collection agencies in terms of conversion rates. Debt collection agencies train and develop their collectors to comply with federal and state regulations, resulting in fewer lawsuits by consumers; are taught our industry’s best practices, skills, and knowledge; and have deep and invaluable experience in collecting from many a variety of industries, consumers, and environments.
The overall impact that bad debt creates on your bottom line can be managed and minimized by implementing a solid collection strategy. Your company will want to compare the costs of hiring an agency like DECA to the chances that the debt can be recovered internally and the bottom line costs associated with each option. Factor in the fact that debt collectors posses collection tactics, resources, and skills that allow for their services to be much more effective and efficient over in-house collections, and determining when outsourcing is necessary for quick and efficient recovery becomes a little more difficult.
Decision makers need to keep this in mind: if an account is long overdue, the likelihood of internal recovery decreases, and the chances for recovery successful from DECA Financial Services increases. If the debt is owed by a customer who routinely pays their bills on time, acting hastily to hire a collector can damage your future relationship with that customer. Finally, always keep in mind that debt collection agencies are better at successfully collecting debt than your company by itself, so when all internal collection efforts have been exhausted, it’s probably time to hire a debt collector.
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John Rainier, Strategy Officer, Deca Financial Services, Deca Financial Services is an accounts receivable management firm.