To operate a organization effectively, every owner has to stay on top of their receivables and monitor their cash flow. Whether you market a product or give a service, you probably have to deal with late-paying or none-paying customers from time to time. That means that you have to have a sound, uniform internal debt recovery policy in place. Part of your policy should include knowing when to outsource difficult accounts to a debt collection agency.
One notable reason this is proper is because your delinquent accounts continue to devalue, at a rate of 15% per month. And the longer an account goes delinquent, the more challenging AND expensive it is to collect. In addition to spending more time, money and resources pursuing these depreciating accounts, its also costing your company in lost opportunity dollars, by taking you away from your core revenue-generating functions. It is far more cost effective and efficient to outsource these difficult accounts to a dispassionate third party debt collection agency.
Below are three significant tips to think about when hiring a debt collection agency.
When hiring a debt collection agency, you need to make sure they are licensed in the state(s) where your debtors are located. Because collection laws can vary significantly by state, its to your benefit to look at collection agencies that are accredited nationwide. Because we live in such a transient culture, and with people moving across state lines a lot, its better to know a debt collection agency that is accredited in all states are familiar with all the different laws and policies. In fact, collection agencies can only collect in the states they hold a license in.
Fee structures can vary greatly with various collection agencies. Some offer prepaid, flat fee arrangements, whereas others cost a percentage of any monies collected, usually with no upfront costs required. Still others can offer some combination of the two. Depending on your business, there are advantages to either situation. While there are upfront costs with flat fee based debt collection agencies, you can save a lot of money in the long run, in view of the fact that the collection costs tend to be a small percentage of the total dollars collected.
Because your costs are unchanging, you can also turn over problem accounts earlier, when there’s a better likelihood for collecting your money. Again, the longer you procrastinate, the more difficult it is to collect.
Still, a lot of organizations elect to give up a percentage of whatever might be collected to avoid the upfront dollar costs. Be sure to compare rates though: a debt collection agency can charge anywhere from 20-50% in contingency fees. One thing to keep in mind though: while you might be inclined to seek out the lowest fees, you should also know that if the fees are very low, it can mean the debt collection agency has limited staff, time and assets that they will commit to collecting your accounts. At the same time as percentage fees charged are significant, success in total recovery is far more significant to your organization bottom line. Whichever option you choose, make sure the debt collection agency you’re considering spells out their fee structure clearly in writing.
Finally, when considering a debt collection agency, you need to think of them as an extension of your organization. Because they will be collecting your money and acting on your behalf, its main that they reflect your organization’s values. For instance, if you run a medical practice, your status in the community is something you value. You wouldn’t want to affiliate with a debt collection agency known to engage in insensitive, hostile and/or inhumane behavior when handling patient collections. At the same time, you want a collection agency that while diplomatic, they are resolute, steady and consistent in their collections activity.
David P. Montana has written widely and worked as a business advisor in collection agency services for thirty years. David offers more helpful tools and resources about choosing the right collection agency.
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