Are You Hindering Your Collection Agency's Efforts?
How to Optimize Your Collection Agency Results
Companies selling other businesses on open terms need to ensure any collection agency partners can effectively collect non-performing receivables. Doing this involves taking a series of proactive steps. These measures will minimize bad debt losses, maximize collection rates and thereby help maintain healthy cash flow, but require the establishment of credit and collection policies with a mind to the possibility that the customer you approve for open credit terms might eventually not be forthcoming with payment despite your best collection efforts — in other words become a deadbeat.
Don’t Shoot Yourself in the Foot
Before examining what needs to be done from a credit and collection policy and procedures perspective, you need to understand the most common reasons collection agencies are unable to collect everything that is due. Here are four prime example of issues that impede third party collections:
1. Poor Documentation
If your business does not maintain complete and accurate documentation, it can significantly hinder the collection process. Collection agencies rely on supporting documents like contracts, invoices, remittance history, proof of delivery, and communication records to substantiate claims and negotiate payment. Missing or incorrect documentation can weaken the agency’s position and provide the debtor with grounds to dispute the debt. This includes outdated or incorrect customer contact details (such as wrong addresses, phone numbers, or business names), which can delay or prevent the agency from reaching the debtor.
2. Delays in Referring Accounts
The longer an account remains unpaid before being handed over to a collection agency, the harder it becomes to collect. Older debts are often more difficult to recover because the debtor’s financial situation may worsen over time, or the business may close, become insolvent, or declare bankruptcy. Delays can also make it harder for the agency to apply legal pressure effectively, and statutes of limitations may limit collection options. Moreover, as debts age, they tend to fall lower in the priority list of the debtor’s financial obligations, making it harder for the collection agency to persuade the debtor to settle the account. All this is why commercial collection agencies typically work on a 50 percent contingency rate (instead of their normal typical 25 to 33 percent rate) for claims that are over a year old.
3. Debtor Financial Distress
If the debtor is experiencing severe financial distress, insolvency, or is going out of business, it becomes significantly more challenging for the collection agency to recover the debt. In cases of bankruptcy or liquidation, the likelihood of repayment drops dramatically, as creditors may only receive partial payments or nothing at all. Even if the debtor does not go into bankruptcy, a debtor lacking a debtor that lacks assets that can be liquidated leaves the collection agency with few viable options. Even if you take legal action and win the case, you may not be able to enforce the judgement
4. Customer Disputes
Business customers often delay or refuse payment by claiming that the goods or services provided were defective, incomplete, or not delivered as agreed. These disputes can stall the collection process, as the debtor may argue that they are not obligated to pay the full amount or any amount at all until the issue is resolved. When the terms of a contract are unclear or misinterpreted, or if there are disputes about agreed-upon pricing, delivery timelines, or service quality, a debtor may leverage the situation to avoid or delay payment. Resolving these disputes often requires negotiation or legal clarification, which complicates the collection agency’s efforts. Such disputes can significantly hinder the collection process, forcing the agency to mediate between the creditor and the debtor.
These four hindrances—poor documentation, delays in account handover, the debtor's financial instability, and customer disputes—can greatly impede the ability of a collection agency to recover debts from business customers. Proactively addressing the root causes of these issues will help improve recovery rates. To do that, you will need to focus on four areas related to your customer lifecycle—customer onboarding, order fulfillment, your collection process, and your collection agency relationship.
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Optimize Your Collection Agency Results
When setting up accounts and managing your accounts receivable, it is critical to implement a structured process that reduces the risk of non-payment and maximizes your chances of collecting on outstanding debts. Each stage of the customer relationship—from initial account setup, through the billing process, to collections—requires careful attention to detail and clear procedures to avoid problems should a customer have to be turned over to a collection agency.
This guide outlines key considerations at each stage, including the importance of collecting thorough customer information, performing credit evaluations, and enforcing clear payment terms. It also covers best practices for managing your billing process, following up consistently on overdue accounts, and engaging with debtors before escalating to a collection agency. Finally, when working with a collection agency, providing comprehensive information and collaborating on collection strategy are vital for maximizing recovery rates. By separating these actions into defined stages, your business can minimize risk and maintain healthy cash flow.
Considerations When Setting-Up New Accounts
Require a Credit Application: This is where you collect all necessary information about your customer: company demographics, principals, primary contacts, bank relationships, trade references, and financial information.
Include a Credit Agreement: There should also be a credit agreement stating your company’s terms and conditions included in your credit application. The agreement should clearly communicate payment terms and penalties for late payment. This transparency sets expectations from the start and strengthens your legal position in case of non-payment.
Perform a Detailed Credit Evaluation: Before offering open terms to a new customer, conduct a comprehensive credit assessments to determine the business’s financial stability and then set appropriate credit limits. This evaluation also serves as your baseline in terms of the future credit performance of your customers, and will help you better understand when their financial performance is deteriorating and how rapidly.
Considerations for Your Billing Process
Well-Documented Transactions: Ensure that all invoices are accurate, detailed, and include key transaction information like due dates, product/service descriptions, and payment terms. Besides the fact that accurate invoices are paid faster than those with discrepancies, invoicing errors are a primary cause of disputes.
Keep Good Records of Every Transaction: Retain all essential documents—such as contracts, purchase orders, proof of delivery, and any related communications. These will serve as critical evidence if the account becomes delinquent.
Make Sure the AR Monitoring System Is Reliable: Your systems should track invoice due dates and flag overdue accounts for follow-up. Early detection of overdue payments can lead to faster resolutions.
Considerations During Your Collection Process
Consistent Follow-Up: Regularly review accounts receivable aging reports to identify potential non-performing receivables and act before the situation worsens. Then, follow a strict process for sending reminders, making calls, and sending warning letters for overdue payments. Timely communication can sometimes resolve payment issues without escalation. If customers are facing cash flow challenges, consider offering adjusted payment plans or terms, which may prevent the need for further collection measures.
Engage Proactively with Debtors: When customers begin to fall behind on payments, engage with them to understand the reasons. Addressing the issue early can prevent accounts from becoming severely overdue. Also, let customers know when their account will be sent to a collection agency if payment is not received. Often, this warning alone can prompt faster payment. However, don’t communicate a warning unless you are prepared to follow through—failing to follow through makes the warning a threat and can cause problems when your agency tries to collect.
Establish an Escalation Process: Set clear criteria for when accounts will be escalated to collections (e.g., 90 or 120 days past due). Consistently apply these triggers to streamline your internal process. By documenting all your collection activities—calls, emails, letters—you can then provide the collection agency with a complete history of your attempts to collect.
Considerations Involving Collection Agency Claims
Provide Comprehensive Information to Your Agency: Supply your collection agency with all relevant documents, including the credit application and agreement, invoices, contracts, proof of delivery, and records of prior collection efforts. This information is critical for effective recovery. Also provide accurate and current customer contact information to avoid delays and improve the chances of successful contact.
Collaborate on Collection Strategy: Work closely with your collection agency to define the best approach for each debtor or type of debtor. Some accounts may require a softer initial approach, while others may need a more assertive strategy. Adjust strategies based on the debtor’s history with your company and their financial circumstances. A one-size-fits-all approach may not be as effective.
Monitor Collection Agency Performance: Regularly review your collection agency’s performance, including the recovery rate and the effectiveness of their strategies. Ensure they are adhering to agreed-upon practices and delivering satisfactory results. If legal proceedings are necessary, stay informed about the status of the claim and ensure all legal documentation is in order to support the collection process.
Learn from the Experience: After working with a collection agency, evaluate the customers’ performance and adjust their credit terms or limits as necessary to reduce future risks. Use the insights gained during the collection process to refine your internal procedures and mitigate future collection challenges.
Final Thoughts . . .
While setting up strong credit policies and maintaining diligent collection processes are vital, it’s equally important to remain adaptable in your practices. The business landscape is constantly changing, and the financial health of your customers can shift rapidly. By staying informed about your customers' industries, adjusting credit terms when necessary, and fostering open communication with both customers and your collection agency, you can anticipate problems before they escalate.
Additionally, view each collection experience as an opportunity to refine your internal processes. The insights gained from working with your collection agency can reveal patterns in customer behavior or internal inefficiencies that may need to be addressed. Ultimately, a proactive, flexible, and learning-oriented approach not only helps you recover debts but also strengthens your overall credit management strategy for long-term financial stability. By clearly separating the actions at each stage—account setup, billing, your internal collection process, and working with a collection agency—you can improve the chances of recovering non-performing receivables and ensure a healthy cash flow.