Engaging a collections agency is far more economical and effective than handling collections in-house, after an account is 30 days past due.
Let us break our analysis into parts – Collection Letters and Collection Calls. In collection letters phase all communication happens by sending written demand notices ( sometimes mixed with automated collection calls). In Collection Calls a “human” debt collector personally calls the debtor.
Sending In-house demand notices vs 3rd Party collection letters:
Do you think that collection agencies make tons of money by sending collection letters?
No !! Collection letters are sent on a razor thin margin.
Cost per contact of an account is a lot more cheaper when engaging a collection agency:
Do you know that based on various estimates, engaging your in-house staff to send a single invoice or a single collection contact is between $16 to $30, when all costs are included. Factor in your in-house staff time, stationary, printing, mailing, equipment, utility costs, errors, software, office space, etc. Yes, these costs add up just that we do not realize it immediately. Even if the cost of letters after the first one might be lower (than the first letter), still sending 5 contacts per account, means you are looking at a minimum of $50 per account even if your in-house staff is ultra-cost efficient. In most cases it will be much higher.
|Sterling Commerce found that the cost of paper based invoice, on average, $30 per invoice to process.
According to “David O. Willis” in his book “Business Basics for Dentists”:
Estimates have have put the total cost of sending a single bill at $16.00.
Any agency which is charging $20 or less for an account ( 1 account = 5 contacts made to the debtor) is a good deal for you. The cost falls to almost $10 an account when higher number of accounts are purchased.
Besides the core cost savings there are 2 additional advantages when engaging a collection agency.
# Advantage – 2
A collection agency sends 5 contacts on your behalf, it will also include Scrubs like “Change of Address” and “Bankruptcy Scrub”, which your internal staff will not do.
# Advantage – 3
Since a professional collection agency is now involved the likelihood of a getting paid suddenly goes a lot higher. Involvement of a Collection agency puts more pressure on the debtor compared to when contacts are made by the in-house staff.
Doing In-house collection calls vs 3rd Party Professional Collector calls
A seasoned professional debt collector whose entire day goes in talking to debtors has too many techniques and tricks to recover debt than a typical in-house employee.
But, in-house collections has a unique advantage, early in the process – An in-house employee can request the debtor to make payment by calling them just after the payment is due, however a debt collector cannot do collection calls 90-120 after the past due date to federal laws.
Therefore it is best to transfer an account to this hard core “debt collection calls” when the account has already gone through the earlier process of sending demand notices or your internal efforts have exhausted or if the account has not been paid off even after 120 days.
Another aspect to think is that if a debtor has not paid you for 120 days now, he will likely not pay you unless he hears from a professional debt collector.
Collection agencies are able to provide cheaper service due to their high volume. Additionally a professional collection agency will certainly have a more efficient approach to collect the debt. Therefore, let your collection agency do what they are best with.. Collections! This also avoids your cost of staffing and training your business associates.
Collection agencies may have their own overheads as well like licencing costs, insurance & bonding cost, their own employees salary, contractor commissions, cost of running website/software, performing scrubs and more. But their costs per accounts are lowered due to the higher volume.
In-house collections do have an advantage that they are able to engage with the debtor on the phone earlier than a collection agency, due to the laws. Some business do not feel comfortable sharing their customer data to an agency. However, most collection agencies have procedures in place to keep the debtors data safe.
Bottomline, if an account is 30 days past due and your basic in-house invoicing approach has not been able to recover money, consider assigning that account to a collection agency before it gets too hard to get your money back. A collection agency can provide services starting from 1st party contacts, then switching over to 3rd party contacts and finally collection calls if needed.
Banks, credit card companies, car dealerships, doctors, gyms, US government, small business owners from all across the board have been using collection agencies for decades now. This is a proven model for recovering on past due accounts, therefore one should not hesitate contacting a debt collection agency and not try too hard to replicate their collections model with an expensive in-house staff.