Commercial debt collections or B2B collections involve two business entities, one of which owes money to another. Your debtor is far more likely to pay when a third-party commercial collection agency is involved.
Good news: The recovery rate in Commercial Collections is fairly good. Most accounts that are less than 1 year old have an average recovery rate of about 80% on viable claims.
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A Brief Summary of Commercial Debt Collection Process
- If a commercial collection agency does not recover money for you, they will not charge anything. A contingency payment model is applicable.
- Tell your collection agency exactly who you think they should reach out to resolve this debt. Apart from the core documentation, do you have any emails in which they have acknowledged the debt?
- An experienced commercial debt collector will analyze your case and develop a custom collection strategy. He will call your debtor/defaulter and get him talking. The collector may even send an email, fax or certified mail to get your debtor’s attention. They explain all the consequences of not settling the debt and the potential effect on their business credit.
- Most cases are resolved within 40-45 days, however, some may last for a few months. The commercial debt collector may also negotiate a payment plan if required.
- To protect the business relationship with your debtor, a well-planned diplomatic approach is used. If needed, a well-calculated intensive approach can be used to resolve B2B debts.
- If all amicable collection efforts fail, a notice may be sent through an attorney (in-house lawyer or a partner law firm). This puts tremendous pressure on your debtor to settle the debt. Legal action is pursued only after written authorization from you.
- If the debtor proposes a settlement offer that is lower than the original amount due, it is accepted only after your approval ( also known as Settle-in-Full authorization).
- The collected amount (minus the collection fees) is remitted into your bank account via ACH transfer or by mailing a check.
Engaging a B2B collection agency avoids the high costs of litigation and costly judgment enforcement. Commercial collection agencies use advanced tools to track any significant changes to your debtor’s business credit profile. By using their skip tracing tools, debt collectors are able to find alternate addresses and telephone numbers of business owners. A commercial collection agency may also be able to find out a recent summary of your debtor’s payment activity with other creditors to help strategize the collection efforts.
Nearly all good commercial collection agencies are registered with the International Association of Commercial Collectors (IACC). Commercial collections are exempted from a 30 day dispute period. Longer you wait, quite likely they may have gone out of business by now. You should provide all the documents regarding the case on the first day. There is no federal “Statute of Limitations” law regarding commercial debt, however, most commercial debt collection agencies will hesitate to work on a case that is over 3 or 4 years old. Commercial collectors are experts in large debt collection claims, serving small businesses to Fortune 500 companies.
Commercial Collection Agency Fees:
Commercial collection agencies have a low-cost contingency fee model; no recovery means no fee is charged. The collection fee for each case is communicated in advance and primarily depends on 3 factors: Age of debt, Balance Due and Complexity of the case. The contingency fee is usually between 20% to 40% of the amount collected. Accounts with lower balances or those which are older than one year have a slightly higher contingency fee. Here is a rough estimate of what a typical commercial collection agency fees are:
|Contingency fee (Based on Account Age and Amount Assigned)|
|Age < 90 days||25%||20%||15%||10%|
|180 days – 1 year||35%||30%||25%||20%|
|Age >1 year||40%||35%||30%||25%|
|Amount Assigned||$500- |
Comparing Consumer (B2C) vs Commercial (B2B) Collections
When businesses think about debt collection, the main driving question is, “what steps can be taken to fully recover the amount due?” The answer to this question will also let a business know what it cannot do when collecting a debt. For individual consumer debts, the list of prohibited collection tactics is considerable, as several laws and regulations seek to protect individual debtors from harassment by bill collectors. When it comes to commercial debt, however, there are much fewer restrictions on debt collection practices. But the lack of regulation does not mean that a wild west-style approach to B2B collections is ideal. A different set of laws apply during commercial collections. Businesses can take several steps to optimize recovery rates. Not just the phone calls and written notices, interestingly enough the emails are often the primary contact medium when collecting B2B debt.
The contact point in Commercial Collections is usually a representative from the accounts payable department. Recovering money can turn into a full-time job for your staff. Collections agency will not only increase the likelihood of receiving full payments but also reduce the burden on your staff. Your debt should ideally be handled by a friendly A+ BBB rating collection agency with no unethical recovery tactics. Commercial collections often involve the vendors of department stores, trucking companies, construction firms, distributors and manufacturers, who have either not paid within 90 days or seeking a refund for the overpayment.
Legal and regulatory collection laws
Consumer debt collection is largely governed by federal laws, such as the Fair Debt Collection Practices Act (FDCPA), and some state regulations. These laws and regulations require collectors of consumer debt to make various disclosures and refrain from certain activities, such as discussing the debt with third parties and making collection calls after 9 p.m. Collectors also cannot use abusive language or make threats of violence or criminal prosecution. Also, the law prohibits consumer debt collectors from giving false information to anyone, and several other regulations and laws protect assets from recovery.
A commercial debt collection agency is completely exempt from most of these laws, because the aim of these laws is to protect consumers, and the concern is that an individual may be more susceptible to misleading information. Technically, then, a commercial debt collector can contact a business debtor anytime and can discuss the debt with third parties without fear of violating laws. It is still, however, important for a B2B collector to avoid misleading debtors or using illegal tactics. While not covered under debt collection practices laws, commercial debts are governed by the commercial contracts between debtor and creditor. If not recovered during the collection process, commercial debt collection moves to the legal enforcement stage. In a court of law, failure to act in good faith can limit the ability of a business to recover the amounts owed.
As of April 15, 2022, CFPB Director Rohit Chopra hinted at the possibility of expanding FDCPA laws to commercial debt also.
Legal remedies guide commercial debt collection
For optimal commercial recovery, businesses should have their eyes on their endgame, understanding their legal remedies if they were to sue on the debt. While there are few restrictions, and few protections for commercial debtors, the ultimate goal is repayment, and harassment might not be the best tactic for collecting from a business customer. When developing a collection strategy, think of what you’ll be required to prove in a court of law if you were to sue on the debt. Be accurate; make sure that you have documentation for payments received and amounts due.
Taking a commercial debt collection case to court is, of course, expensive. The judgment you may receive is only enforceable if the debtor has assets, and even then, there is a lengthy and costly process involved. There is no law restricting you from threatening legal action, but following a two-pronged approach can make discussions of legal remedies more productive. First, know what you are legally entitled to, and second, understand the costs of securing a legal victory. These two factors ultimately will guide your recovery efforts.
Relationships matter: Negotiate for better recovery
While it is essential to understand your legal remedies completely, it is almost always best to avoid litigation. More productive recovery can result from encouraging discussion about how to settle the debt amicably and in a way that may even continue a working relationship in the future. If you have a business customer who is past due on obligations to you, try to avoid confrontation and instead work together to solve the problem. It’s most likely that the customer wants to pay, but business is not going as well as expected or some other temporary problem is making payment in full difficult. Debt collectors must conduct themselves with the highest degree of professionalism and refrain from actions that may permanently sever any ties.
When a customer gets behind in payments, take the following steps:
- Stay in contact. Harassment is not very productive, and casts the collector as a “bad guy.” Instead, maintain open lines of communication in a positive way. Keep the door open.
- Offer mutually beneficial solutions. Nonpayment happens. Your business should be prepared for an acceptable level of accounts receivable, but also can work to minimize this amount by offering options, such as extended repayment plans, and even forgiveness of a portion of past due amounts.
- Discuss options. Make sure that the customer is aware of the options that you have for settling the debt and moving forward. Include these in new client onboarding, and you can encourage open communication if your customers experience financial difficulty.
- Think about tomorrow, not today. When negotiating with commercial debtors, work together to ensure payment in the future. Your business’s success is tied to your customers’ success. Work together today, and help your customers achieve success, even out of bad times.
- Keep legal remedies in mind. While flexibility and working with a debtor are key to eventual recovery in most cases, it is also important to remember your legal remedies. If a customer simply cannot pay, or their business is being liquidated, you may need to pivot to protect your legal interests quickly.
Blurring the line between personal and commercial debt
A commercial collection agency has fewer restrictions, however, many commercial debts are backed by a personal guarantee. When the collections process moves to the enforcement stage, such as levying against bank accounts and other assets, you may be limited by the individual guarantor’s rights. For example, an individual’s personal protection against wage garnishment may kick in when enforcing a commercial debt. While this activity may not be covered by the FDCPA, other federal and state collection laws offer protection and can limit the ability to recover.
Ultimately, just as with consumer collection practices, maintaining a positive relationship is key to productive collections.