Despite advances in workflow automation and payment technology, collecting commercial receivables is not getting any easier. Despite improvements in order-to-cash (O2C) processing, the explosion in digital payment mechanisms creates new complications. In addition, the regulatory environment is growing, as is the number of invoices being disputed by customers.
Then there is the issue of economic uncertainty. There’s scant hope that interest rates will return to pre-Covid, easy-money levels anytime soon. Market volatility and rising costs are instead disrupting working capital budgets, causing late payments that inflate accounts receivable (AR). From economic swings to shifting customer habits, business owners must deal with a host of factors impacting their ability to get paid what they’re owed.
Ensuring Successful Debt Collections
Even with these headwinds, there are steps trade creditors can take to improve their collections game:
Be Proactive: It starts with a comprehensive credit application and vetting process and is complemented with clear communications about terms, the billing process, and the expectation of on-time payments. Follow up promptly when a customer’s first invoice goes past due and continue escalating the pressure until paid.
Employ Technology: Automated billing systems, debt collection software, auto-cash, and other tech tools effectively streamline your cash conversion process. These technologies can monitor delinquent accounts, generate automated reminders, and facilitate customer communications.
Offer Flexible Payment Options: Not only will enabling customers to utilize their preferred method of payment (e.g., check, ACH, credit card, etc.), but also offering flexible payment plans, installment options, or early payment discounts will incentivize customers to settle up.
Know the Law: Familiarize yourself with the legal complexities of commercial credit and debt collection. Make sure you and your team understand the basics of the Uniform Commercial Code, Bankruptcy Statutes, and other regulations to avoid compliance pitfalls and missed opportunities to secure payments.
Get Help from the Pros When Appropriate: When debts drag on despite your best efforts, don’t hesitate to enlist professional debt collectors or a creditor’s rights attorney. Their expertise and resources can accelerate difficult recoveries, protect your interests, and allow you to focus on the things you can more easily impact.
To read the rest of the article and learn nine factors you should consider when shopping for a collection agency, as well as eight red flags that indicate you should look for another agency, you need to be a paid subscriber to Your Virtual Credit Manager. The good news is that until May 1, 2024, annual subscriptions are only $29.40 . . . forever . . . that’s 40% off the standard price
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Selecting a Collection Agency
By conducting thorough due diligence before engaging a commercial collection agency, you can mitigate risks and maximize the chances of successful debt recovery while maintaining compliance with relevant regulations and ethical standards. Keeping the following nine factors in mind when you are shopping for an agency will help ensure you get the best results possible:
Reputation and Reliability: Research the reputation and track record of the collection agency. Look for reviews, ratings, and testimonials from other clients to gauge their reliability and effectiveness in debt recovery. The credit managers in your industry can be a good source of recommendations.
Licensing and Compliance: Every collection agency you hire should be properly licensed and compliant with all relevant federal, state, and local regulations governing debt collection practices. 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.
Legal Expertise and Dispute Resolution: Make sure the collection agency has a thorough understanding of relevant laws and regulations governing debt collection. They should also have mechanisms in place for resolving disputes and handling legal issues that may arise during the collection process. The legal expertise and attorney network used by a commercial collection agency are crucial aspects to consider, especially when dealing with complex or challenging cases that may require legal intervention. An agency's attorney network can provide representation in court proceedings, including filing lawsuits, obtaining judgments, and representing the creditor's interests in legal proceedings. Collaboration between the collection agency and attorneys enhances the effectiveness of debt recovery efforts, particularly in challenging cases.
Transparent Fees and Terms: Before placing any claims, clarify the fee structure and terms of engagement to avoid any surprises later on. The agency should be transparent about contingency fees, flat fees, or additional charges that may be associated with their services such as court filing fees or skip tracing fees. Commercial collection agencies generally adhere to one of two main models: fixed-price and contingency-based pricing Ensure that you understand the implications of each pricing model and how it aligns with your specific needs and preferences. Here's a breakdown:
Fixed-Price: Here, the agency charges a predetermined, fixed fee for their services regardless of the outcome of the debt collection efforts. This fee may be charged on a per-account basis or as a flat fee for a certain period of service. Fixed-price models offer predictability in budgeting and may be preferred when dealing with smaller debts or when the likelihood of recovery is uncertain.
Contingency-Based: Under this model, the agency charges a percentage of the amount recovered from the debtor as their fee. If they are unsuccessful in recovering the debt, you do not owe them anything. Contingency fees provide an incentive for the collection agency to maximize recovery efforts, as their compensation is directly tied to successful outcomes. The typical fee range can vary depending on factors such as the age and size of the debt, the industry, and the difficulty of collection. However, common contingency fee rates usually fall within the range of 20% to 50% of the amount recovered. Some collection agencies may offer tiered fee structures where the percentage decreases as the size of the debt increases.
Fees for Attorney Services: If a case requires the involvement of attorneys, additional fees may apply for their services. These fees typically vary depending on factors such as the complexity of the case, the amount of legal work involved, and the attorney's billing rates. Fees may be charged on an hourly basis, a flat fee for specific services, or as a percentage of the amount recovered, similar to the agency’s contingency fee.
Collection Process: You need to find out the agency’s collection strategies and ensure that the collection agency follows ethical and professional collection practices. They should adhere to guidelines outlined in the Fair Debt Collections Practices Act (FDCPA), which prohibits harassment, false representations, and unfair practices in debt collection.
Customization and Flexibility: Choose a collection agency that can tailor their approach to meet your specific needs and preferences. They should be flexible in adapting their strategies based on the nature of your business, the industries you are in, and the types of debts being collected.
Data Security and Confidentiality: Verify that the agency has robust measures in place to protect the confidentiality and security of sensitive information shared during the debt collection process. Depending on your location and that of your customer, compliance with data protection regulations such as the European Union’s General Data Protection Regulation (GDPR) may be necessary.
Performance Metrics and Reporting: You should expect to get detailed reports on the progress of their debt collection efforts on your behalf, including the number of accounts recovered, payment statuses, and any challenges encountered. Clear communication and regular updates are essential for tracking performance so ask up-front what they provide.
Exit Strategy: Establish clear protocols for ending the engagement with the collection agency if needed. Ensure that there are provisions for seamlessly transferring accounts back to your internal collections team or another agency. Situations change, and the best agencies understand this and will cooperate when you need to change course.
For tips on working with collection agencies, go here.
If You See These Red Flags, Find a New Agency
While the vast majority of commercial collection agencies operate ethically and within legal boundaries, there have been instances of unethical practices within the industry. Some common unethical practices include:
Harassment and Abuse: Using aggressive or harassing tactics to pressure debtors into paying, such as constant phone calls, threats, or intimidation. Such actions violate the FDCPA and could open your firm up to liabilities.
Misrepresentation or False Claims: Making false or misleading statements to debtors regarding the nature or amount of the debt, the consequences of non-payment, or the agency's legal authority to collect the debt. These actions also are illegal.
Unauthorized Fees and Charges: Some agencies will try to increase their revenue by charging debtors unauthorized fees, penalties, or interest beyond what is legally permitted. Inflating the debt with unjustified charges is a fraudulent activity.
Threats of Legal Action: Threatening debtors with legal action or implying that legal consequences will occur if the debt is not paid, without the intent or ability to follow through on such threats can mislead debtors and is considered an unfair practice.
Unauthorized Communications: Unauthorized disclosure of debt-related information to third parties without the debtor's consent, except in specific circumstances permitted by law is an invasion of the debtor's privacy. This includes telling another supplier that you are going to specific actions against the debtor.
Re-aging Debt: Manipulating the reporting date or last activity date on a debt to reset the statute of limitations or re-age the debt, making it appear more recent than it actually is deceptive and violates credit reporting regulations.
Ignoring Dispute Requests: Agencies are legally obligated to provide verification of the debt upon request and to cease collection activities until verification is provided.
These unethical or illegal practices harm debtors but also tarnish the reputation of the agency’s clients and the collection industry as a whole. To maintain trust and integrity in their operations, collection agencies must adhere to strict ethical standards and comply with applicable laws and regulations.
Your Collection Agency Should Be a Trusted Advisor
Selecting a collection agency requires thorough consideration of reputation, licensing, legal expertise, and fee transparency. It's crucial to research the agency's track record and compliance with regulations while ensuring they possess legal knowledge and dispute resolution mechanisms. Transparency about fee structures, customization options, and data security measures are also key factors to evaluate. Establishing clear exit protocols ensures flexibility in case of changes in strategy or circumstances.
All the above help ensure the agency does a good job collecting on your behalf. What can be more valuable over time is the credit and collection expertise an agency can share with you. The best agencies will often be able to identify the problems their clients are encountering and then help identify solutions to improve AR performance and cash flow. That can only happen after an open and sharing relationship has been forged.