Time for collectors

There is no secret about what debt collectors do. They collect outstanding debts on behalf of customers. Collectors can work on either a contingent basis, where they charge a percentage of the debt collected, or they can purchase the debt outright for a fee which entitles them to any money collected.  Because debt purchase is usually conducted on a large scale most small businesses would deal only with debt collectors on a contingent basis.

Debt collection agencies are used for many of the same reasons that other services are outsourced. They are experts in their field and this expertise generally results in better outcomes. Importantly, by outsourcing collections small businesses can get back to what they do best - running their own business.

Although a collection agency can do nothing a creditor cannot do to collect a debt, an agency frequently produces better results.  A debtor usually doesn't want a collection agency-and possibly other creditors-to know it pays slowly. When approached by a collection agency, most companies prefer to avoid this reputation damage by paying in full or by discussing mutually agreeable means to retire their debts.

An account placed for collection gets the attention of experts in your customers' business. Such handling relieves credit managers of the burden of collecting certain past-due accounts, which could take up too much time and concern.

Once you have given an account your best shot, let another expert give it a try. Be realistic. Maybe a different person with a different personality and approach will be able to retire the debt. An impartial third-party collector-drawing on its experience with a wide variety of difficult debtors-often can resolve past-due accounts faster and with less vexation than a credit manager.

So what type of debt should be referred for collection?

Initially this seems an easy question to answer.  Any debt overdue for a certain period of time - perhaps 45 days - should be referred to a professional debt collector. Some other examples might include:

  • The customer reveals it has had changes in its financial condition, falling sales, or widespread payment delays
  • Collection costs do not justify further internal effort
  • The customer demonstrates bad faith or gives you reason to doubt its credibility.

These are all important indicators that a debt should be referred to professionals for collection. However, your cash flow can be improved by a more sophisticated approach to collections.

A good collection agency will be able to do more than just collect debt. The very first step they should take is helping you determine what debt is collectable and the best way to collect it. This analysis will be based on their understanding of different types of debt and the collection strategies that work best for each.  Using this approach will usually turn up some surprises and is likely to result in debt that is not yet overdue showing signs of potentially becoming overdue while some overdue debts may be easily collectable by yourself with some minor adjustment to your approach.

The key to using a professional debt collector is maximising the cash they collect on your behalf and the first step is ensuring you forward the debts that give you the best chance of boosting your cash flow.

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