You have a loyal customer who’s past due on a big invoice. Your company’s terms are 30 days. As the Accounts Receivable Manager, you make a friendly reminder call at 45 days. “Sorry, paperwork got tied up,” or “we didn’t receive the invoice. We’ll send a check today,” the customer claims.
Now 60 days go by and you still haven’t been paid.
You don’t want to strain the relationship by calling again, so you send an email. This time, your customer admits to a cash flow issue – they’re waiting to get paid by a client. “It’s nothing to worry about,” they promise, and "it should be resolved in a week."
But then another month goes by. You call your customer again and can’t connect. You leave messages, send an email, and mail out a final notice letter…all to no avail.
What should you do?
If your company is expanding, then so is your bad debt – which can impact your job security.
While studies show that internal collection efforts are most effective during the first 60 days, once you’re approaching that two-month mark without success, it’s time to call in the experts: A commercial debt collection company.
Here are some answers to questions you may have about working with them:
We’re just a mid-size business. Won’t the cost of a commercial debt collection company be too high?
Outsourcing any kind of work will cost money, but writing off bad debt will cost you more. Every time you deduct an unpaid invoice, it requires additional sales in order to replace it.
For instance, according to the Commercial Collection Agencies of America, if a business with a 5% net profit writes off $100k in bad debt, it would require an additional $2 million in sales to make up that loss.
In addition to that, using internal resources to collect can be time-consuming, more expensive and less effective than outsourcing collections.
In the end, getting help from professionals who specialize in this can bring your business more money long-term. They're out chasing the hard-to-collect debts, while your time's freed up to focus on other accounts and parts of your job.
How does a commercial debt collection company get paid?
Most commercial collection companies work on a contingency basis – they only get paid on amounts that are collected. If they don’t collect anything, then there is no charge.
What if a collection company wants an upfront fee?
With many reputable debt collection companies operating on contingency fees, it’s hard to justify using a company that charges you an upfront or minimum fee. That said, some collection companies use a flat contingency rate for all claims, while others offer tiered contingency rates.
How are tiered contingency fees dictated?
There are a variety of factors that dictate fees, such as the size of the debt, age of the account and type of work required to collect.
Some debt collection companies that tier their pricing may charge higher rates for smaller claims. Others calculate pricing based on the age of the debt. In other words, the longer the invoice has been outstanding, the higher the fee.
For instance, if a customer has an unpaid invoice that’s 60 days past due, a collection company may charge a 20% contingency fee. However, if the customer hasn’t paid in a year, the fee may be 30% or more.
That means you can save money by placing delinquent accounts earlier – at the first signs of trouble. Not only will the chances of recovery be far higher, but your collection fee lower, as well.
What if a lawsuit needs to be filed?
It may get to the point that in order to reclaim your money, you have to take legal action against your debtors. An experienced collection company can help with that too, by pre-qualifying your case to determine any liabilities before a suit begins. That way, you can avoid additional complications and more importantly, losses.
How do I find a debt collection company for my business?
Commercial collection companies come in all shapes and sizes. Whether you choose a small or large company is up to you.
Just make sure they're registered with both the Commercial Collection Agencies of America and the Commercial Law League of America. These two associations are the industry's ethical watchdogs. Also, be sure to contact the Better Business Bureau to find out if any significant complaints have been filed against the company.