Using a Debt Collector

Introduction

A debt collector should only be employed when your internal debt recovery measures have proved fruitless and you are not convinced legal action will recover sufficient or any payment. If a debt collector proves successful, without the debt collector making a personal visit to the customer, this is a good indication that your own debt recovery tactics need reviewing. There is nothing you cannot say that the debt collector can. You can set up a 'PO Box Number ...' under a collection name to give the impression of an outside body, with an independent telephone line at your offices.

However, if you really do not want to get too involved with true debtors, try a debt agency. Debt recovery companies are some of the biggest companies around. They use up to date technology to secure payment from debtors: for very little cost. In a 'standard' case the debt agency will charge about 8-10%. The cost, even in difficult cases, never usually exceeds 25%. The art of using a debt agency is not to use them too late. Give them a chance to collect while the debt is 'young' and success is probable.

Do You Need a Debt Collection Agency?

Debt recovery is a huge problem for business owners today. Most businesses do not have enough resources to give the proper amount of time and effort it takes to properly collect its past due receivables. Debt collection is a very arduous process, and keeping your in-house collection staff motivated to collect from abusive customers is difficult. Collection agencies can help with some of these issues.

When in comes to debt collections, what is common sense is not always common practice. Most of the time, the attempts to collect debt consume a lot of time and are very emotional. This in turn causes a great deal of frustration. If you find yourself emotional or angry about not getting paid, you might consider using a debt collection agency. Collection agencies and professional companies who's only function is collecting money. Statistics show that in-house debt collection efforts are only 70% effective with ninety-day invoices. When the debt reaches six months, returns drop to 50%.

Outsourcing your debt to an experienced debt collection agency has many benefits. It allows your business to:

• receive more cash sooner
• focus on core functions
• reduce operating costs
• improve cost, quality, service and cycle times
• reduce exposure to regulation and technology risks

Debt Collections Fees & Selecting Collection Agencies

Selecting a debt collections agency based only upon the lowest fee charged may not always be the best choice. While price is always a factor in making any business decision, it should not be the sole determining factor. We all know the old adage; "You get what you pay for." This is especially true in the debt collections.

Low debt collections rates (money recovered) often result in collection agencies scaling back their collection efforts. Most of the collectors are on commission, and a lower fee means they get paid less —which means they have less motivation to collect. Collection agencies are businesses and needs to earn a profit too. Lower prices or fees often mean that collection agencies will cut back on collection efforts to reduce expenses and earn a profit.

Instead of a low collection fee rate a creditor should focus on a measure called 'net back'. This means the amount of money returned to a company from accounts placed for collection after the debt collections agency has been paid its fee. Money that the company can use in its business. This is true cash flow that collection agencies have recovered.

Often, collection agencies that charge a low collection fee do not produce enough net back. Following provides a simple example. For this example, it is assumed that a company places an equal dollar amount of accounts with two collection agencies. Debt collection agency 1 charges 30%; debt collection agency 2 charges 40%.

	Debt Collection Agency 1	Debt Collection Agency 2
Amount Placed	€100,000	€100,000
Amount Collected	€30,000	€60,000
Collection Cost	€9,000 (30%)	€24,000 (40%)
Net Back	€21,000	€36,000

In this example of net back, debt collections agency 2 returned €15,000 more to the company than debt collections agency 1 although debt collections agency 2 had a substantially higher collection fee, 40% vs. 30%.

You would be way ahead of the game if you had chosen debt collections Agency 2 over debt collections agency 1. It is important in selecting collection agencies that you look beyond the fees that they are charging and understand the other elements, like collector motivation, the debt collection agency reputation and recovery rates that will be applied to collect your accounts.

Questions To Ask a Prospective Collections Agencies

What collection procedures will the collections agencies apply to the collection of your accounts? Will the debt collection agency rely on letters or will they also be using telephone collections, and where necessary place your accounts with attorneys for legal action. Does the quoted fee include all of these services or are there different fees for telephone collections and legal forwarding? These are just some of the debt collections questions you need to ask the debt collection agency or collection agencies that might collect your bad debts.