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In a Tough Economy, Collection Agencies Help Businesses Maintain Cash Flow and Good Relations with Clients

Untitled Document In September 2008, The Economist reported that the average number of days it takes businesses in the United States to collect money owed to them has reached an historic high of 41, up from 39.7 days in 2006. Normally, the rate of change is no more than a half of a day in either direction year-over-year, so this recent change is significant.

Considering the current state of the economy, readers of this column might only be surprised that the change is not greater.

Ripple Effect
As lending institutions have become stingier with credit, businesses have had to develop alternate strategies to fund operations and growth. Large firms have clout and the financial wherewithal to slow down payments to smaller creditors, just as banks have done to them. However, small businesses that do not pay on time may find their supply lines severed just when their customers are also delaying or missing payments.

Pressure from Customers
Paradoxically, when buyers, (whether businesses or end-user consumers) understand that sellers are hurting, they expect ever-better deals, including lower prices and more favorable terms to incentivize them to purchase, creating pressure from the bottom of the supply chain.

Fine Line
Businesses large and small find themselves caught between needing the money owed them and alienating customers by stringent demands for payment. Likewise, businesses may benefit in the short term by restricting credit to reduce the risk of non-payment. Yet every unfriendly credit decision may result in customers walking, never to return.

Strategy for Success: Hiring Commercial Collection Agencies
Its more cost effective to nurture existing customers than to acquire new ones, so many companies are responding to market pressure by reducing prices, extending terms, and offering promotions. At the same time, they are becoming more aggressive in helping their customers keep to payment schedules.

As it is with parenting, so it goes with sales: simultaneously trying to be good cop and bad cop can be just as confusing for customers as it is for children, which is why companies are calling in commercial collection agencies. The benefits are many:

  • Company representatives avoid becoming embroiled in adversarial relations with customers that can deteriorate to the point of no return, literally
  • Company representatives can use their time to nurture existing business and develop new clients instead of collecting debt
  • Collection services are usually paid on performance, so they are not a drain on business cash flow
  • The sooner collection is attempted, the more likely it is to yield results, so collection agencies should not be viewed as a last resort but rather as a normal business process

Immediate Relief
Businesses that need funds immediately may be able to sell their accounts receivables outright to debt purchasing agencies. In this case, businesses receive only pennies on the dollars owned to them, but they get their money right away and get to take the liability off their books. Debt purchasing companies make their money when they are able to collect more than what they paid for the accounts.

The decision to hire collection agencies or to sell debt is more about the need for cash than about the relationship with delinquent customers. Neither choice necessarily precludes sellers and buyers from doing business in the future.

The Economist
Finance for Non-Financial Managers

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