Bad Debt

Small Business Collection Agency: Debt Recovery

Unpaid bills can result in a substantial financial drag on any business. Collecting money from accounts receivable can be very tricky, especially when you have shared a long-term business relationship with these clients.

Without a proper debt collection strategy, these accounts tend to become non-recoverable over time. Hiring a debt collection agency becomes mandatory when your in-house recovery efforts are exhausted. Always select a collection agency whose approach is achieving higher recovery rates while preserving your good business reputation and customer relationship.

Here are the top 7 things small businesses want from a collection agency:

High Success Rates and Excellent Online Reviews
Low Cost and Transparent Fee Structure
Professional and Ethical Practices
Strong Client Support Team and Reporting
Customized Solutions for Specific Needs
Focus on Preserving Customer Relationships
Ability to do Skip Tracing and Credit Bureau Reporting

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• Nationwide Coverage • US Citizens-Only Team • High Recovery Rates • Free Bankruptcy screening • Free Credit Bureau reporting • Free skip tracing • 5-star rated • 24×7 Secure Portal • Industry Specific Collectors • Cost-Effective

Past-due accounts can result in several financial issues, including:

Negative cash flow for your small business.
A severe cash crunch may restrict the ability of a small business to continue with its normal operations.
Delay in providing salary to your employees.
Even hamper your ability to make payments to your own suppliers.
Frankly, everyone hates following up with customers regarding payments; again and again, it results in a growing frustration in your staff and wastage of their time and “your”money.

Does your Small Business have an Internal Accounts Receivable Strategy?

Unless you create a well-defined policy for your staff, you will keep losing money to unpaid bills. What different steps should you take when a bill is 15 days overdue, then 30 days, then 60 days, etc. There must be a well-documented policy in this regard. Here are a few things to consider:

1. Has this happened for the first time?

Send another reminder invoice by certified mail, and keep a copy for your records. Then make a phone call the day after the client receives your reminder invoice. Say something like this .. “John, maybe you did not get our invoice last time. Therefore, we have re-sent it.“, then carefully listen to what the client has to say. The client will likely give you the reason for non-payment, even without you asking for an explanation.

There is a possibility that their delay is simply due to an oversight, glitch or a temporary business circumstance. For example, an officer who issues the check could be on leave, a temporary non-serious cash flow crunch, or maybe the client never received your invoice or lost it. They might tell you that the payment will be issued today or tomorrow if it was just an oversight.

But, if the client appears to be deferring the payment or giving false excuses, take it as a warning sign. Keep this account under watch.

Your staff should also be informed in advance to be extremely careful, professional, and diplomatic with such clients. Since there is a doubt regarding their ability to make timely payments, have a well-planned strategy to prevent their debt from increasing further.

2. Has the client started to delay payments repeatedly?

There is likely a more significant problem brewing at your client side. Maybe the client’s own business is not doing too well. You should find out. Politely ask, “John, we have been doing business with you for “X” number of years, and getting payments on time was never a concern earlier. Would you mind sharing with us what has changed recently?“.

Tell them that your own business is also facing problems due to this delay in payment. You could say, “John, since your payments are late, it has created some cash flow problems for us as well. Our small business runs on a very thin margin. I request you to clear our bills at the earliest“.

Showing your problem will convey that it’s not just your eagerness to get paid but your own compelling need behind it.

3. Do you have a better alternative?

Since getting compensated for your products or services has become an ongoing problem, start looking out for other clients/business partner/supplier who does not have a cash flow problem. Doing business with your current client has become too risky; it’s the right time to cut the cord and minimize your losses.

4. Do you know the real reason behind these non-payments?

Talk to all contacts you usually deal with at this client’s office. Maybe another client contact will disclose the reason for non-payment, although you can never be sure if the reason given by your client is right or not. Keep notes of what the client says during each call and if the story changes in the next call. Be mentally prepared for all kinds of excuses.

Meanwhile, start preparing to outsource the debt-collection process to a 3rd party Collection Agency.

5. Show faith in your client. It helps.

Create a good relationship so they will want to pay you first because other parties like you may also be waiting for payment.

“John, we have been doing business together for a while. We have great trust in your organization“.

Call it “moral faith” or “moral pressure“, but it works.

6. Control your anger

Speak less and to the point. Be a good listener. Regardless of the circumstances, never sound harsh or try to threaten your client, or lose your temper. If you annoy them, it may delay your payments further. A threatening language can even result in a counter-legal action against you Do you know there are debt collection laws in every state, and some of them also apply to original creditors like you? Generally, the in-house collections are not very successful after the account has been over 30-60 days past-due date.

Talk diplomatically and amicably. Keep your conversation short and to the point.

Do not interact too firmly or appear indifferent to their problems. This may irritate the client, and they may intentionally delay your payment even further. Similarly, do not try to be very soft and personal with the client, only to be taken for granted.

7. Give them the option to pay in installments

Has it been over 4-6 weeks from the payment due date, and the sending reminder invoices or making calls have not worked? Now try giving your client an option to pay in installments. If that fails, then stop taking any more stress yourself. The matter is beyond your own control.

That’s it .. now what? ⛔

Don’t waste more time

Hire a Small Business Collection Agency

8. Most likely, you cannot resolve the situation in an amicable manner

Your client has repeatedly failed to make a payment multiple times despite reassurances. He is already avoiding taking your phone calls. Does he need more time to clear the debt? Has he suddenly started to dispute the quality of your services? The time is up.

Let an expert collection agency deal with this situation. The involvement of a Small Business Collection Agency is truly a game-changer.

9. Don’t waste more time: ( “Really-Really” Important)

If you remain on the sidelines regarding whether to transfer an account to a collection agency or not, the situation will only worsen over time. Without a doubt, approach a small business collection agency if your payment has been due for over 60-90 days.

Statistics prove that the longer you wait, the harder it becomes to recover your money.

The involvement of a professional debt collection agency automatically puts astronomical pressure on the client. Collection agencies have many tricks and legally valid ways to collect money that you may not even know.

Commercial collection agencies will not charge you anything until your money is collected. Depending on the amount owed and the circumstances, a small business collection agency will charge between 30% to 40% of the amount they recover. Fully understand the fee structure before hiring a collection agency.

10. Maintain proper proof of the services or products delivered, including all communications made with your client

Keep all invoices, proof of goods or services delivered, and copies of reminder invoices sent by you. Also, keep a copy of communications done via email and the date/time of phone calls made by you and what they have been telling you. Provide this information to your Collection Agency while submitting this account.

11. Take LEGAL ACTION if necessary.

Depending on many factors (age, the amount owed, and risk), your small business collection agency will advise you if filing a lawsuit is advisable.

There is no guarantee that your business relationship with the client will remain intact. Still, a step-by-step approach will increase the chances of resolving things amicably.

The cost of hiring a collection agency and information about their services is mentioned here. This includes Collection Letters, Collection Calls, Skip Tracing, Various Scrubs, Legal, Advanced Skip Tracing, Diplomatic Contacts, Credit Checking, Credit Bureau Reporting, and much more. Contact us for your small business debt collection agency needs. Do you need a Local or a Nationally licensed collection agency? Does your small business require Spanish Debt Collections or not?

Recommended article: Improve Cash Flow for your Business

What is a Debt Collection Agency?

Collection Agency is an organization that attempts to collect money from individuals (or businesses) who have not paid their bills on time. Accounts are typically transferred to them after they have been over 60-90 days past due.

What kind of debt can be assigned to a debt collection agency?

1. Unpaid medical bills of a doctor or hospital.
2. Services or products which were sold but were not fully paid.
3. Mortgage debt, credit cards bill or other forms of bank delinquencies.
4. Unpaid phone bills, gym bills or other recurring membership fees.
5. Unpaid installments of car loan, student loan or bank loans.
6. Other interest and penalties.

Overall, you can initiate collection activity for almost any past due account for which you are legally entitled to get paid for and have sufficient proof to back your claim.

Example

Let us assume, you are a ‘dentist’, and your patient agreed to pay for your services in 5 installments. But the patient has stopped paying after the 2nd installment. Your gentle reminders to the patient have not resulted in any success. Would you write off the unpaid amount or would you go after the patient by trying harsher measures? It is advisable to avoid both. Taking intensive measures could even result in counterproductive action against you.

Now you approach a Collection Agency to collect your past due amount from your patient (or say, Debtor). Depending on the type of service you select, a Collection agency will attempt to collect the outstanding debt and charge you a fixed fee or the percentage of the debt collected. (Read: Services that Collection Agencies offer).

Should I try to collect the debt myself?

Sure, if your staff has time to do a few polite reminder calls or send bills to the debtor, and then time to do the follow-up for the same, try it out. But be extremely careful, respectful, polite and patient during your communication with the debtor. Most likely you will realize that too many man-hours are being spent and your staff is probably trained adequately to handle these situations.

Collection agencies are not only experts in collecting debt, the moment your debtors get to know that a professional debt collection agency is involved, but they are also more inclined to pay off the outstanding debt at the earliest.

Documents to prove you legally own the debt:

There are thousands of collection agencies in the United States, big and small, and each has a different way of working and the services they offer. In most cases, the collection agency will not ask you to submit all proof (or paperwork) of the outstanding debt initially, they will ask you to provide that if and when needed. For example: If the debtor disputes the charges. A collection agency will normally start the collection activity by asking only the basic information like Debtor Name, address, phone, amount due, bill/reference number, date of debt and sometimes debtor’s SSN. At all times you should maintain sufficient proof of the outstanding debt.

Additional information:

As mentioned earlier, collection agencies are experts in collecting debt, that’s what they do all year long. They ensure that the demand notices being sent out with maximum impact (collection letters, collection calls or legal notices), and that debt collection laws are followed, it includes “Fair debt collection practices act” specified by each state.

Before a collection agency signs you up as a client or starts accepting your past due accounts for collections, they will ask you to sign a legal agreement (on paper or an online contract). This agreement authorizes them to start collection activity on your behalf. Their agreement also includes important disclaimers and some standard legal stuff.

It is normally advisable to start collection activity after it has been over 60 days from the Date of debt, or that date when the payment was due. The sooner you submit an account for collections, the chances of recovering your money are significantly higher.

Defaulted debts are often reported on the debtor’s credit history, and it stays there for several years.

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How do Debt Collection Agencies work?

Collection agencies are specialists in debt recovery. Their highly trained and well-equipped teams can successfully collect even from accounts that are typically difficult to recover. When in-house staff struggles to collect overdue accounts, businesses often turn to professional collection agencies for assistance.

Collection agencies play a vital role in the financial ecosystem. Without their involvement, many outstanding debts would remain unpaid, resulting in significant losses for businesses and medical practices. While no collection agency can guarantee the recovery of 100% of the assigned debt, they employ proven strategies and work diligently to collect as much as possible. In fact, a single call from a professional debt collector can have a greater impact on a debtor than repeated attempts from in-house staff.

Types of Debt Collectors:

1. “Collection Agencies” – Agencies that act as a middleman between the creditor and debtor using standard recovery techniques. They attempt to collect the debt in full. Some agencies operate in one state only while others have a nationwide license.

2. “Debt Buyers” -Debt buyers buy debt that is deemed unrecoverable. Debt buyers buy unpaid accounts by paying pennies on the dollar and readily agree to settle the debt even if a way-lower payment is offered.

3. “Collection Lawyers“: Unlike Collection Agencies, they do not have a single collections approach for all accounts. They study each case, give a customized solution and quote a fee accordingly.

Here is a detailed explanation for each of them.

1. Collection Agencies

When a creditor approaches a collection agency, he is offered three types of collection services: Collection Demands (Letters), Collection Calls and Filing a Legal Suit.

a) Collection Letters (Fixed Fees Service- Accounts purchased in advance) – A collection agency sends up to 5 collection letters to a debtor and charges between $10 to $25 upfront per account for this service. Collection letters are sent every ten days or so. They run a “USPS-Address-Change” scrub on these accounts to ensure the letters are mailed to the latest address of the debtor. This is also called skip tracing.

They also check if the agency/creditors are legally prohibited from collecting a debt. For example, when a debtor has been granted bankruptcy protection or if he has deceased.

During the Collection Letters service, all amounts go directly to the creditor, the collection agency keeps nothing other than the small flat fees they had charged earlier (roughly $12-$16 per account). You can also add the late fees to the amount due if your contract permits.

The creditor must report all payments made by the debtor directly to them so that the Collection Agency can print the correct (lower) outstanding amount on the remaining letters. They will stop sending letters if the amount has been Paid in Full or deemed uncollectible through written demands and may require stronger action.

Collection Letters service is usually recommended for debts that are within 30-120 days past-due date. They give far superior results than your own in-house collections. You may check our sample debt collection letters to get an idea of what the debtor receives from a Collection Agency.

b) Collection Calls (Contingency-based, No Collection – No Fees) – This is where an actual human being (debt collector) picks up the phone and starts making phone calls to the debtor. This is a contingency-based collections service and is usually recommended for debts older than 120 days, or if the Collection Letters service did not recover the debt.

A Collection Agency would usually not accept an account for collections if the debt is older than 3 years. They also specify the minimum amount of debt that can be assigned for this service, usually, there is a $100 is the cutoff limit.

With their extensive experience, debt collectors are able to make a perfect collections call. They are able to handle debtor excuses way more professionally, patiently, and smartly than your own employees. Most agencies hire multilingual staff to handle Spanish collections if required.

The collection agency keeps 33% to 50% of the amount collected per your agreement and passes the remaining money to you (the creditor). Do not always fall for those ultra-low-cost collection agencies, because their recovery rates may be a lot lower. If a collection agency is near you do not hire them just because of that reason, in debt collections, the location does not matter.

Hiring a good collection agency is really important to get superior collection results.

c) Filing a Legal Suit (Contingency based) – This is the third type of collection service where a Debt Collection Agency’s attorney (or a partner attorney) sends legal notices to the debtor. The attorney may even try to collect the outstanding amount against the assets of a debtor or garnish his wages. Assets could be the debtor’s bank account, brokerage account, and even against certain types of real estate that the debtor may own.

Collection agency usually takes a cut of around 25%-40% for these kinds of cases. These accounts should carry high-value debts to justify the cost of hiring an attorney.

Collection fee can be negotiated with the collection agency in case the outstanding amount is in thousands of dollars or if it is a B2B debt (commercial/business debt).

In the case of B2C debt (individual/consumer debt), there is usually no room for negotiation. Individual debts are harder to collect, and unlike B2B accounts the B2C debts are subjected to far more stringent collection laws.

2. Debt Buyers:

Debt Buyers purchase bad debt in bulk and pay a little money to the creditor for it. The collection activity starts after the purchase. For example, if the outstanding debt on an account is $1000, a Debt Buyer may buy it for $50 only. Accounts are usually settled at a lower price point. For example using the above scenario: A debt buyer will happily settle the account even if the debtor offers to pay $200, for a nice $150 profit. The Debt Buyer keeps 100% of the money recovered, and does not need to share anything with original creditors.

3. Collection Lawyers:

A collection agency does not always do collection activity, many lawyers are in this industry as well. They study each case, give a customized solution, and quote a fee accordingly. In this case, a debtor will receive a legal notice or a phone call from the lawyer’s office. If there is a co-signer on the debt, the collection activity can also be made on the co-signer.

Fair debt collection laws:

There are several “Consumer protection laws” and the “Fair Debt Collection Practice Laws” that all debt collectors are supposed to follow during consumer collections. Here is the list of all debt collection laws.

A debt collection agency should be respectful, law-abiding and truthful. They should not discriminate against people based upon gender, race, age etc. They should not contact you in odd hours, like late evenings or very early mornings. They cannot try to threaten you bypassing statements like “If you do not pay, the police will arrest you“.

If the collection agency determines that the debtor cannot pay the debt in full, they can settle an account for a slightly less payment if the creditor allows doing so. A debt collection agency may also allow the debt to be paid in monthly installments. Debts do have an expiry date, there are some statute of limitations beyond which a collection agency is not allowed to sue a debtor. For example, many states in the USA, have a rule that a debt older than 4 years cannot be collected upon. Other states have a 3 or a 10-year cut-off period.

Credit Bureau Reporting

Non-payment of debt can be reported to credit bureaus ( Transunion, Experian and Equifax) by the collection agency if the original creditor wishes to do so. This negative entry on the debtor’s credit history report can be quite damaging because the chances of getting a new loan goes down significantly for many years. He may also face problems in changing jobs as many employers run credit checks on their prospective employees.

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Importance of collection agencies

Due to the nature of their business, debt collection companies have a bad reputation. FTC gets the highest number of complaints from this industry. But see the flip side, there are thousands of collection agencies in the USA, giving employment to hundreds of thousands of individuals. They also help many businesses to avoid going out of business due to unpaid bills, saving their jobs as well.

Do read our article about how to improve the cash flow for your business and minimizing accounts receivables. While you outsource all those problems in debt collection to a 3rd party collection agency, you can focus on more important things like expanding your business or serving your existing clients.

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