When Should You Consider a Debt Collection Agency?  

Most business owners will reluctantly consider professional debt collection at some point in their careers. Slow-pay and no-pay customers are a fact of life that most small business owners can’t avoid.  

In my professional opinion, the average small business owner waits far too long to seek help, resulting in unnecessarily low recovery rates.

How Late Is Too Late?

So, how do you know when to escalate debt collection and involve a reliable debt collection service provider? Waiting too long to take action can make debt recovery significantly more difficult, but you don’t want to jump the gun either.

Six Signs that It’s Time to Turn to a Professional Debt Collector

1. You’re thinking about your debtor and the money he owes you after hours.  Accounts receivable and bad-debt collection are business functions. If you’re thinking about your debtor when you should be sleeping or enjoying your family, it’s time to consider professional debt collection.
2. Your Cash Flow is Negatively Impacted.  Are you avoiding your creditors because cash is tight? Don’t allow customers to impact how you pay suppliers and employees. When you can’t pay who you want to pay when you want to pay them, it’s time.
3. You are Neglecting Your Core Business to Chase Debt. Are you engaging in debt collection work instead of work that builds your business and produces income? Consider the opportunity cost of collecting old debt instead of generating new revenue. It’s time to consider a debt collection service when low-level collection work takes precedence over focus on your core business.
4. Your Bookkeeper is “too busy” to Do Collection Work.  Look up the qualities of a good bookkeeper, and right alongside organized, computer literate, and good math skills, you’ll find good communication skills. Talk to a few bookkeepers, and you’ll find people who are organized, like to solve problems and prefer numbers to people. Small business owners mistakenly assume that a bookkeeper can and should be able to collect late receivables. Not necessarily so! Professional Accounts Receivable and Bad Debt Collectors will recognize the red flags that tell them when to use a debt collection service. Those same warning signs may just annoy your bookkeeper. To get the most out of your available resources, let bookkeepers keep books and expert debt collectors collect debt.
5. Your Sales Reps are Chasing Your Customers for Payment.  Small business owners and sales reps alike often believe that the sales department should handle collecting delinquent accounts. We disagree. The conflict between sales and accounts receivable in businesses of all sizes is well established. Salespeople believe we’ll say something we shouldn’t, possibly damaging their relationship with the customer. Business owners believe that to earn their commissions, salespeople should finish what they started. We believe this is a poor use of resources and that sales reps should focus on growing your customer base, hence your business. Business owners should focus on solving problems, and collectors should collect. It’s the opportunity cost again. When sales reps are collecting, they aren’t selling, leaving prospective sales to your competitors.
6. And Last But Not Least, how old is the invoice? Has your customer broken more than one promise to pay? Click here for a complete list of Red Flags and Warnings Signs – the more of these you see, the more likely it’s time to engage a debt collection service.

Is it Worth Paying a Collection Agency?

My absolute and unequivocal answer is … Maybe? The truth is it isn’t always worth it. It depends on several factors specific to your business and the nature of the debt. Here are some considerations to help determine if it’s the right move for you:

The Short Answer

Worth It: For larger debts, where internal efforts have failed, and you need legal expertise or specialized tools to recover the money.

Not Worth It: For small debts, cases where you highly value the relationship with the debtor/customer, and you have the resources to manage the collection process internally.

The Long Answer

It’s Worth If:

1. The Debt is Significant: If the outstanding amount is substantial, the potential recovery—despite the agency’s fees—could make it worth pursuing. Large debts often justify the cost of using a collection agency.
2. Your Internal Efforts Have Been Exhausted: If you have made repeated attempts to collect the outstanding balance and the customer remains non-responsive or evasive.
3. Time Constraints: If chasing unpaid accounts drains resources that could be better used for core business operations. Outsourcing to a collection agency can free up your team’s time and allow them to focus on more productive tasks.
4. You Need Legal Know-How: If you’re unfamiliar with the legal requirements surrounding debt collection, hiring a collection agency ensures every legal avenue for collecting your debt will be pursued, maximizing your chances of recovery.

It May Not be Worth it If:

1. It’s Too Old: If the debt is approaching the statute of limitations (the period after which legal action is no longer possible), we recommend moving on. Okay, that‘s the party line, but our experience is that anything over two years is probably uncollectible. You still have a shot, but it’s a long shot. At 36 months, we recommend you move on.
2. The Debt is Small: If the amount of the debt is small, your time might be better spent taking care of viable customers or looking for new and better customers.
3. You Value The Customer Relationship: If the debtor is a long-term customer or someone you want to maintain a relationship with, sending their account to collections will almost certainly damage that relationship, almost certainly losing their business for good.

Should I Accept a Settlement?

Again, unequivocally – Maybe. Ultimately, the decision to accept a settlement depends on the specific circumstances of the debt, your business’s financial situation, and your relationship with the debtor. In many cases, recovering a portion of the debt through settlement is preferable to a prolonged collection process with uncertain results. However, it’s important to carefully evaluate each situation and potentially consult with legal and financial advisors before agreeing to a settlement. Here are some pros and cons:

Pros of Accepting a Settlement

1. Quick Resolution: Accepting a settlement allows you to resolve the debt quickly, avoiding a potentially lengthy and costly legal process[1]. This can free up time and resources you can focus on running your business.
2. Guaranteed Partial Payment: A settlement guarantees you’ll receive at least a portion of the debt owed, which may be preferable to the uncertainty of pursuing full payment through other means. There’s always a risk the debtor could declare bankruptcy or go out of business, leaving you with nothing.
3. Preserve Business Relationships: In some cases, settling may allow you to maintain a business relationship with the customer if that’s desirable. A settlement is typically less adversarial than aggressive collection tactics or legal action.

Cons of Accepting a Settlement

1. Reduced Payment Amount: The most obvious downside is that you’ll be accepting less than the full amount owed. This means writing off a portion of the debt. However, you should be able to, at least partially, offset this loss with a tax write-off.
2. Potential for Abuse: Some debtors may attempt to use settlement offers to avoid paying debts they can actually afford. If the debtor’s financial information is unclear, they may try to take advantage.

What About Payment Plans?

We are fans of payment plans. Remember, our thesis throughout this website is that bad debt collections should always be a last resort. Here are some pros and cons:

Pros of Offering Payment Plans

1. Avoiding Legal Proceedings: By agreeing to a payment plan, businesses may avoid costly and time-consuming legal actions to recover debts.
2. Increased Likelihood of Collection: Payment plans make it more feasible for debtors to pay off their balances, especially if they are experiencing financial difficulties. By breaking up large sums into smaller, more manageable payments, businesses increase their chances of recovering at least some of the owed amount.
3. Preserved Customer Relationships: Payment plans can help maintain positive commercial client relationships. This approach demonstrates flexibility and understanding, which may lead to continued business in the future.
4. Predictable Cash Flow: Payment plans provide businesses with more predictable cash flow. Regular, scheduled payments allow for better financial planning and forecasting.

Cons of Offering Payment Plans

1. Extended Collection Time: The total amount owed will take longer to receive. This delayed receipt of funds can impact a business’s cash flow and working capital.
2. Risk of Non-Payment: There’s always a chance that the debtor may stop making payments despite the agreed-upon plan. This risk is particularly high if the debtor’s financial situation worsens or they declare bankruptcy.
3. Administrative Burden: Monitoring and managing payment plans can be time-consuming. It may include tracking payments, following up on missed installments, and potentially renegotiating terms.

Considerations for Implementation

When deciding whether to offer payment plans, businesses should:

1. Assess the debtor’s financial situation and the likelihood of following through with payments.
2. Clearly define the terms of the payment plan in writing, including consequences for missed payments.
3. Consider using automated payment systems to reduce administrative overhead.
4. Evaluate the potential impact on cash flow and weigh it against the likelihood of full collection.

Summary

Remember the Goldilocks principle, but this time, it’s more than just porridge at stake. Use the strategies we’ve outlined to decide when to involve a collection agency for collecting unpaid balances. The timing has to be just right: not too early or before you’ve exhausted your own efforts, but not too late either, when the agency may have limited options to assist you.

Need expert advice? We’re here to help. Contact Vienna at 800-201-CASH (2274) x110 with any questions or to discuss a debt situation.