Calling in the Collection Cavalry
How to Get the Most out of Your Collection Agency Relationship
There will inevitably be a day when you realize your collection efforts are not getting a delinquent customer to pay their bill. Despite all the correspondence, calls, excuses and possibly promises made, there still has been no progress.
What can you do?
The easy answer — refer the customer account to a Collection Agency when all else has failed to get you paid. A Collection Agency will use proven third-party methods to collect. Most agencies also have a network of attorneys who can file a lawsuit in the appropriate court should in house agency collection efforts fail.
Most Commercial Collection Agencies work on a contingency basis, typically charging 15 to 50 percent of the amount collected depending on the age of the receivables, the size of the claim, the volume of business you place if you are a regular client, and their ability to collect on your past claims — you are not charged if they cannot collect. Most agencies charge 25 to 35 percent for claims less than a year old and over a few hundred dollars. In some cases, they may charge a fixed amount for making the effort, especially if the likelihood of collection is small, the claim is small, or the claim is old.
Please feel free to share this newsletter with your small business customers . . . it just might help them pay you sooner!
Speed and Timeliness Are Critical
For your Collection Agency to work effectively on your behalf, your own collection efforts need to be comprehensive and timely. Your collection efforts from the date the debtor goes past due, to the date you turn them over to a Collection Agency, to the date you commence legal action is a continuum that calls for increasing intensity of collection efforts and continuous escalation of the matter.
Delays and failure to increase the pressure on the debtor only serve to reduce the probability of collection. If a debtor promises to pay and doesn’t come through as promised, you need to jump all over them.
Diligent follow up is critical, so it is important you stick to your timeline. This is especially true of smaller debtors. Don’t waste time hoping they will pay. It’s okay to be quick to turn them over to a Collection Agency, because that frees up time for you to pay more attention to collecting past due balances from larger customers. If after paying they still want to buy your goods or services, just be sure to keep them on cash in advance terms.
Delinquent large customers merit more time and effort. First, a default may cause a potentially devastating loss of cash and profit. Second, the cessation of sales to any large account will cause a significant decrease in revenue. Therefore senior management involvement in remediating a large delinquency is often essential, not to overlook the contribution of everybody else, particularly sales, involved in the customer relationship.
Failing to collect it all at once, a key objective involves finding a way to continuously reduce large past due balances over time. This is much easier said than done, as the debtor will invariably miss payments while you continue to sell them on credit. Referring a large debtor to a Collection Agency is the final step and signals the end of the business relationship.
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Do This When a Customer Becomes a Debtor
Here are three steps to take with seriously delinquent and uncooperative customers, henceforth known as debtors:
Make sure you have done everything within reason to collect from the debtor. It’s a waste of money to refer an account to a Collection Agency if you’ve expended little collection effort or your execution of those efforts was sub-par, only to watch the Collection Agency collect the entire amount in short order. Here’s what constitutes an effective collection effort on your part:
Validate that the receivables are legitimate. Was the customer account billed but the product not shipped or services delivered in full? Has the customer raised a valid dispute? If so, resolve the dispute — it’s not a collection issue.
Several collection calls should have been made with increasing urgency and a stern message that failure to pay can lead to held orders and potential referral to a third party Collection Agency.  If you normally speak with the debtor’s accounting or AP function, at least one call should be made to the CFO/CEO/Owner — this can be very effective.
Use Credit Holds when possible — all subsequent orders or the ongoing provision of service neeeds to be suspended and the debtor informed of this.
Charge Late Fees — these should be included in the credit agreement you have new customers sign. Offer to waive the charges for full payment made by a specified date. If not paid, late fees get added to your collection claim.
A Ten Day Final Demand Letter Should Be Sent via certified mail (signature required), demanding immediate full payment, while stating that the debt will be turned over to a Collection Agency and the delinquency reported to the Credit Bureaus). If you reach this juncture and the debtor does pay, demand up front payments before any future sales.
Immediately refer the account to a Collection Agency once all the items in step one have been covered. Don’t procrastinate — that only reduces the probability of collection. The rule of thumb for maximizing the return on claims placed with a Collection Agency is to turn the debtor over when they are between 90 and 180 days past due. Many agencies also offer a free demand period, where a form letter on the agency letterhead is sent to the debtor demanding payment — the agency won’t take any action during the free demand period (typically 10 days) or charge you if the claim is paid during that time.
Speak to the Collection Agency about commencing legal action if their efforts have not generated any payments within 60 days of placing the claim. Typically the agency fee will drop to between 10 and 15 percent, but the attorney will want their 33% contingency fee upon collection plus court costs. With smaller claims, it will sometimes make economic sense for you to file in small claims court, with or without an attorney. On larger claims, however, remember that time is money so don’t get hung up on the fees. In the meantime, the agency should be providing you with monthly reporting covering all your active claims, and interim updates on individual debtors.
Your Virtual Credit Manager now offers reasonably priced business credit reports through Accredit, a leading reseller of credit bureau reports.
Three Hundred Cautionary Tales Â
We’ve worked with over three hundred enterprises to improve their accounts receivable (AR) performance. One scenario we all too often have witnessed involves a company letting their exposure to a significant customer or group of customers get out of hand. In addition to owing a substantial amount of past due AR, these customers are typically facing financial difficulties of some sort. Under these circumstance, the company owed the debt is rarely able to:
Collect most of the past due AR, and even worse,
Keep the AR from increasing over time
This despite numerous meetings, promises, payment plans, and a great investment of time, much of it from senior managers. This is not an encouraging story. We cite it to show that even larger customers that receive a great deal of management attention are difficult to turn around. So, don’t let a medium size delinquency grow, while you hope for a better outcome. For your small and medium customers, let the Collection Agencies take the lead after you have made a first collection pass or two.
To reiterate, decisiveness and quick action for declining AR situations is the best way to maximize cash flow and reduce bad debt exposure from customers.
Choosing A Collection Agency
The Collection Agency industry is very competitive. The major distinction among agencies is whether they focus on collecting from consumers (B2C) or businesses (B2B). There are some consumer agencies that also collect commercial debts, but they are best avoided for more complicated commercial trade debt collections. There are also agencies that specialize in certain industries.
You also want to stick to agencies that are not just state bonded, but have also been certified by the Commercial Law League of America, the International Association of Commercial Collectors or the Commercial Collection Agencies of America.
These factors, plus their pricing, track record and references are the important considerations for choosing an agency. But a word of caution is due on pricing. Track record is more important. The most effective agency for your company is the one that provides the highest Net Return on the claims you place.
Net Return is simply the amount recovered less expenses (such as legal and filing fees) as a percentage of the total dollar amount in claims placed. It’s very common for a good agency that works on a 25 percent contingency basis to deliver a higher Net Return than the agency charging 15 percent. Often the difference is because the 15 percent agency is cherry picking easy claims or is primarily a consumer agency whose production line type collection process is not flexible enough to handle the complexity of many B2B debts. Also, an agency that can collect more of your debts without involving an attorney will typically deliver a higher Net Return.
Your Virtual Credit Manager can recommend Collection Agencies in the USA, Canada and the EU suited to your particular needs.
Final Thoughts on Turning Debtors Over to a Collection Agency
Placing a debtor for collections is a relatively simple process. Most Collection Agencies now have online portals that allow you to fill out a claim form, check if you want a free demand letter sent, and then allow you to upload supporting documentation. This last item is very important and should include a statement of account for the debtor, copies of invoices, other supporting documents like proofs of delivery or service tickets if there has been a dispute, a copy of their credit application, a recent credit bureau report, any related correspondence, and a copy of your contact log/call notes. In our experience, the major shortfalls in utilizing Collection Agencies are:
Not properly documenting your claim
Waiting too long to place the claim
When customers are paying well beyond their assigned terms and a substantial portion of their AR is past due, quick action to halt any further increase in AR and aggressively collect the past due AR is warranted. Collection Agencies can be very effective in maximizing recovery from these customers, especially when you have been diligent in your collection efforts and documenting your claims.