Three Options for Bill Collection

Commercial collection agencies can help companies collect receivables through contingency collection or debt purchase.

In-house Accounts Receivable
The first line of defense in collecting payment is company employees who perform the AR (accounts receivable) function. Both vendors and customers have a vested interest in keeping a relationship on good footing; vendors want to continue selling to as many (profitable) customers as possible, while customers want ongoing access to products or services.

In-house accounts receivable personnel can often work out payment plans with slow-paying clients who want to fulfill their obligations but are unable to do so. They can make judgment calls on these accounts based on the needs of the business and on their knowledge of the customers.

Company representatives can also withhold pending or future orders and can threaten legal action or to send accounts to third party collection agencies. However, not all accounts respond to payment plan offers or repeated invoices or calls.

When to Call in Commercial Collection Agencies
As time goes by and receivables remain unpaid, it becomes increasingly costly to continue working them--yet doing nothing could prove most expensive of all. At this point, companies often look to commercial collection agencies to help them out. Defining the point when it is most beneficial to engage collection agencies is both a science and an art.

Collection agencies usually charge 15% to 50% of whatever they collect, depending how old the debt is and how much work is put in before payoff. Although the percentage retained by the collection agencies is known up front, the amount they will actually collect is unknown. The science of outsourcing collection efforts lies in running numbers and using contingency theory to find the point at which it is more profitable to bring in a collection agency than to soldier on with in-house staff.

The art of choosing the time to hire collection services involves intuiting when continued contact with company representatives would cause relationships with customers to deteriorate beyond the point of no return. At this stage they may be salvaged by backing off and having a collection agency take over. Engaging a collection service earlier in the process often results in more collections at lower cost.

Debt Purchasing, an Alternative to the Collection Agency
When companies are in a cash crunch or have little or no staff for accounts receivable work, selling their AR to a debt purchasing company may be an option. Debt purchasing companies pay pennies on the dollar for the outstanding debt, but businesses get their money immediately rather than waiting to see if, how much, and when the debt purchaser is able to recover. Selling debt provides a low yield, but it is a sure thing.

Sources
The Fair Debt Collection Practices Act
Finance for Non-Financial Managers