How a Collection Agency Boosts Business and Finding the Right Collections Partner

When a small business extends credit to customers and clients, the action spurs an increase in buying. But what happens when the business begins mounting several unpaid debts? Using a collections agency not only recovers outstanding debts, it leaves an already tough job to the real professionals. Heres how to evaluate and utilize a collection agency.

Overdue accounts have always been a thorn in the side of companies that extend credit. But for a small business, unpaid debts can choke the life out of cash flow. A collections agency can be a powerful partner for business development. And because the collections process has become riddled with regulations and time-consuming processes, this is a task best left to experts.

The workings of a collection agency are fairly simple: The agency agrees to locate the debtor and collect on the debt in accordance with the Fair Debt Collection Practices Act. In return, the creditor pays a premium to the agency for these services. It goes without saying that time is of the essence in collecting a debt. AllBusiness cites a survey by the Commercial Law League of America revealing that the probability of collecting an overdue account drops to 73 percent after just three months, to 57 percent after six months, and to 29 percent after one year. So the business is paying the collections agency for both money and time saved.

When and How to Collect

Some small businesses may not realize the protocol for addressing an overdue account for one of two reasons. The first is that the business doesnt know when or how to collect--its not something taught in small business school. The second is that the business doesnt want to create bad feelings that could cost them future business--they just want to be paid. Heres what the Collections Agency section of LifeTips has to say:

• Debts up to $100: Attempt collection 5 to 6 times using in-house collection letters--then turn the account over to a collection agency or write it off as a bad debt
• Debts from $100 to $1,000: Attempt collection 3 times using in-house debt collection letters--then turn them over to a collections agency
• Over $1,000: Invoice 3 times using in-house debt collection letters--then turn it over to a collection agency

If all attempts fail, the business should perform an asset search of the debtor to determine if there are sufficient funds that could be recovered through legal action. Reporting the debtor to a credit agency is also a smart move.

Collections Agency Evaluation and Selection

Because unpaid debts can be such a sticky subject, taking care to select the right agency is paramount to a smooth process. Performing due diligence means researching the history of the agency to determine their methods and success rate. The Small Home Business section of Suite101 suggests the following benchmarks:

• Specialization: Collections agencies that focus on small businesses get the nod--they know the ins and outs already. They should also have experience collecting on the business particular type of customer
• Tactics: Federal regulations have become much stricter on how agencies can collect. Finding an organization that adheres to these guidelines keeps the business from overstepping the line
• Fee Structure: Expect a collections agency to charge a set fee or on a contingency basis. Fees vary widely, so it pays to shop around for the best rates. A word of caution--companies should never compromise performance for a cheaper rate

Collecting on outstanding debts is one of the most trying aspects of running a small business, but staying on top of the process makes it much easier to weather in the long run.

Sources

AllBusiness.com

LifeTips

Suite101