Collection agencies can play a valuable role in accounts receivable management. The rules of engagement are not always clearly explained. Here are a few tips about when to use a collection agency, and how to go about picking the right one.
When should I consider employing a collection agency? – Take a look at the terms you have agreed upon with each customer, and then consider how late payment actually is. If you have already extended credit to your customers, you may be looking at extremely late payment. At some point, you will know that the likelihood of collecting is slim to nothing. Then is the time to be sending those invoices to a collection agency. There are a few easy steps to establishing if the agency is reliable. Here are five to consider:
- Choose a licensed agency. You do not want to be held liable if collection laws are violated. A harassment suit could end up costing your company in time and money. The agency should be licensed in all states. Searching to see if your agency of choice is CCAA certified would also be a recommendation. These agencies are certified by the Commercial Law League of America, and will be reliable and knowledgeable when it comes to collecting on your delinquent accounts. While this consideration may seem obvious, the percentage of licensed agencies in the U.S. is incredibly low.
- Find out how long they have been in business, and if they have a strong customer base. Their business is about collecting money, therefore the longer they have been in business, the more successful they are at collecting, and their customers are returning as a result.
- Make sure they are bonded and insured. The collection business is never a simple endeavor, and there is a likelihood of lawsuits. It is vital that the agency you hire has the ability financially to deal with any lawsuit. Smaller, agencies may be cheaper and seem to offer a great solution, but should they go out of business before distributing your money, you will have no recourse for collection from them! In this vein, find out how long it takes to receive the collected funds.
- Check their communications policy. Do they regularly keep you informed on progress, and do you have a dedicated account manager who is easily approachable. It is worth also considering their business hours, and whether you are able to communicate with them out of regular hours. The ability to check your account status online can be a huge benefit. Another vital part of communication is whether they contract out to third parties for collection. Make sure they keep it all in-house when collecting on your delinquent accounts receivable.
- Establish fee structure. Some agencies may charge an upfront flat fee, and some may take a percentage of the money collected. While a percentage of the collection amount means no money upfront, a flat fee may save you money in the long term if you have many delinquent accounts for large sums of money. Also make sure there are no hidden fees for extra services employed in the debt collection process, such as fees for approaching debtors who are hard to locate, or court filing fees should legal action be necessary.
Check their experience in your field of business, and try and assess their approach when interacting with your customers. Deciding to use an invoice factoring company can be a huge help when it comes to regular collection on your outstanding invoices, reducing the worry of having to use a collection agency. Collection agencies and factoring companies are not the same, but there are some similarities to consider when deciding to factor your account receivable. Factoring companies are extremely careful when it comes to vetting your customers and will go to great lengths to make sure payment will be prompt when it is due. A good factor will understand your industry and approach your customers professionally, taking the worry out of your collections.