Using a collection agency is an investment in your business. Considering your accounts receivable is one of your largest assets, insuring that you get all of what is owed to you is important and using a collection agency can aid in your ability to collect everything. However, the choice you make in using a collections agency and choosing which one to work with could end up with your loosing more than you are collecting. Depending on what collection agency you work with, the costs could end up being exorbitant or the collection agency could damage your customer relationships. Choosing a collection agency should be taken seriously and looked at as an extension of your business.
In this white paper, we will take a look at what type of agency best fits your business, how to evaluate collection agencies, what the true cost of using a collection agency is and what your alternatives are if you choose not to use a collection agency
WHAT TYPE OF COLLECTION AGENCY BEST FITS YOUR BUSINESS?
Collection agencies vary in the different types of services they provide and areas they specialize in. When searching for a collection agency that fits your needs, this can be a very difficult task. How do you know the collection agency is truly a good fit and will be able to collect on your accounts like they say they will? When you’re spending money in order to collect the cash that is already owed to you, it is important that you have all of the facts in place and have evaluated every collection agency as best as you possibly can.
There are three main areas in which you can start evaluating a collection agency that will help to narrow down your search: the number of claims, size of claims and type of debt.
NUMBER OF CLAIMS
Depending on the number of open claims you have, a certain collection agency may be the best fit for you. If you have a smaller number of open claims, a smaller agency would be a best fit, while a larger number of claims would be best suited to a larger agency. The reason for this is that a smaller number of claims typically expect to have a more personalized experience, which a smaller agency is more apt to be able to handle. On the other hand, a smaller agency may not have a team large enough to handle a large number of claims.
AMOUNT OF CLAIMS
Depending on the dollar amount of the claim, a collection agency might have certain approaches for each one. If you have all smaller claims, then a collection agency using automated process, such as an automated accounts receivable software that sends automated emails, would be a good fit. However, once your claims become a larger dollar amount, such as $25,000 or above, you would want a collection agency that can offer a specialized approach by calling and speaking directly to the customer. The best collection agency to find, especially if you have claims that range in amount, is one that can offer a mixed approach, using automated processes for small claims and personalized for larger.
TYPES OF CUSTOMERS
The types of customers you have will also determine the type of collection agency you should hire. First, depending on whether you are a B2B business or a B2C business will help you decide which collection agency best fits your needs. Some agencies specialize in one of the either. Second, your industry can play a huge role in which collections agency fits your needs. For example, if you’re in the medical industry, you will need an agency the understands the role of HIPPA and compliance rules around collections in your industry. If you’re in construction, you will need an agency that understands liens and other industry-specific collection processes.
HOW TO EVALUATE A COLLECTION AGENCY FOR YOUR BUSINESS
As consumers, even in the B2B space, we spend a lot of time researching our options before making a purchase. For example, you rarely try out a new doctor without references, buy a new piece of technology like a laptop without reviews or purchase the new iPhone without hearing what new features are available. The same is true for choosing a new collection agency. It’s just as important to take stock on who will help you collect on your open accounts and what they stand for.
Below are steps you should take to better evaluate your future collection agency.
The best way to review a company’s reputation is by simply doing an internet search. Often times, if the company has a bad reputation this will show up in a search. By searching on Google, you can find star ratings on the right-hand side of your screen, along with additional company information. It is also important to check with the Better Business Bureau. If anyone has made a formal complaint against the company, this information will be made available on the Better Business Bureau website.
There are two ways to go about gaining client testimonials on collections agencies. The first, which may or may not be available, is client testimonials on the agency’s website. These may be in the form of success stories, quotes or videos. By paying attention and reading these, you can also get a good feel for whether the agency would be a good fit with your industry and your unique needs if they have other customers that are similar to you. Another way to obtain customer testimonial is to request references from the company after speaking with a sales agent. However, remember that in both of these instances, only the best customers with the most success will likely be made available to you.
Although this aspect may be the most surprising to some, it’s important to consider a company’s core values when looking for a partner in collections. These core values cover the overall philosophy of the business, what their strategy of collections involve and the overall experience of their collectors. It’s important to place emphasis on these core values because you never want to hire a collection agency who may use intimidation tactics on customers if that is not what aligns with your company’s core beliefs. Finding a collection agency that acts as more of an extension or your values and services makes a huge difference in customer retention and overall collections efforts.
Listed are a few other aspects to evaluate collection agencies on:
- How many years has the collection agency been in business?
- Is the collection agency involved in industry foundations or continuing education?
- Is the agency compliant with industry rules?
THE COST OF USING A COLLECTION AGENCY
The most important factor to take in when choosing a collection agency is how much it will end up costing you. Not all collection agencies use the same model for pricing or offer the same rates. Since you’re already behind on collecting these accounts, you want to make sure you are still walking away from the account making money and not spending more than you’ll ever get.
There are three different common pricing models you will find for collection agencies; upfront payment, contingency based on size and contingency based on age.
Some collection agencies will ask for a down payment, minimum payment or upfront fee before you start working with them. Then, once you have paid they minimum fee, they will begin working and will charge based on the total number of hours you worked or the total number of accounts they collected on for you. Most of the time, this pricing model does not make a lot of sense, as there are many companies that don’t charge an upfront fee. Be careful with collection agencies when you see this worked into your proposal.
CONTINGENT BASED ON SIZE
Collection agencies with a pricing model based on size won’t charge anything until they have actually collected money from one of your accounts. This is a nice model because you aren’t spending money unless you’re making money. Based on size refers to the size of the invoice. For example, if the collection agency collects on an invoice worth $1,000, they will keep 50 percent of the invoice. If the collection agency collects on an invoice worth $50,000, they will keep 15 percent of the invoice. The rest of the invoice is left for you to collect.
CONTINGENT BASED ON AGE
This pricing model is similar to contingent based on size, however the payment for the collection agency is based on the how old the invoices are. The older the invoice, the larger of a cut the collection agency gets to keep. For example, if the invoice is 1-2 years old, they might keep 50 percent of the invoice, whereas if the invoice is only 90 days past due they will only keep 20 percent of the invoice. The only downside to this model is how much the invoices are worth. If your invoices that are 1-2 years old are smaller amounts, the collection agency will take most of the money you were looking to collect on.
The disappointing part about using a collection agency, in general, is you have to give up some of your hard-earned money. You might have worked hard to earn $10,000, but in the end you’re only taking home $5,000. It’s important to note that, because of this, using a collection agency should be your last line of defense to collect. You should make every effort to collect on the invoice on your own, such as employing technology like automated accounts receivable software, so that you can still collect the full amount.
ALTERNATIVES TO USING A COLLECTION AGENCY
Using a collection’s agency for your difficulties in collecting on time can be a costly option right off the bat. A collection agency is going to cost you money simply to collect on those accounts that failed to pay you for the work you already did. No matter what, that collection agency is going to take a cut of your profits.
Using a collections agency to collect on your past due invoices should always be your last resort. Before turning to a collections agency, try using the following steps.
If you’re struggling to collect on a significant number of accounts, enough that you are considering using a collections agency to aid in your process, then it might be time to go back and look at your current collections process. You may be missing some crucial steps that could help you to collect on the invoice without help from a third party.
Are you sending your invoices on time or are they getting to the customer late? If you’re sending the invoices out a week late and you have a 2 week time period to pay them, then you’re not giving your customers the time they need in order to pay the invoice. If you want your customers to pay on time, you need to get them their invoices on time.
Take a look at your invoices and make sure they contain all the necessary information, and that the information is clear. Is the due date clearly marked on the invoice? Is the information on how to pay, such as where to send checks or how to pay online clearly indicated? If the customer requires supporting documents, such as a purchase order or statement of work, are those included with the invoice? Some companies cannot make a payment until those supporting documents are included with the invoice.
If you have not heard from the customer since sending out the invoice, make sure you are following up with them. It could be as simple as the customer forgot. Initial follow ups can be made via email, sending a reminder to make a payment as the due date gets closer. Once the due date goes past, follow-ups should be made via phone call.
USE DEBT COLLECTION SOFTWARE
Debt collection software allows your company to do more and reach more people without adding anyone additional to your staff. Follow-up emails can be sent out automatically without the collector having to lift a finger. Follow-up phone calls can be recorded and transcribed for your record, especially if you eventually need to take the case to court. Every day when logged into the system, collectors can simply run through a queue of assigned accounts, knowing exactly who to call and when. Difficult accounts can automatically be alerted and assigned to a senior accounts receivable representative. Finally, alerts can be made based on a customer’s potential credit risk – weeding out bad customers before their invoices go unpaid.