If you have unpaid bills from customers, you’re not alone. A 2017 report by Sage entitled “The Domino Effect: The Impact of Late Payments” found that 10 percent of bills are either never paid or paid so late that the company is forced to write them off.
If you’re a small or medium-sized business owner, you probably don’t have the staff to process one in ten invoices. If this is a large number of unpaid bills for your business, it may be worth hiring a collection agency to deal with customers who are not paying their bills. But where do you start?
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Please investigate
Different agencies have different specializations. For example, some are better at getting results from larger companies, while others are more adept at collecting companies at home. You should make sure that you are working with a company that actually meets your needs.
Ask if they qualify
This may seem obvious, but before hiring a collection agency, you need to make sure they are qualified and licensed to act as a collection agency.
Not every state requires collection agencies to be licensed, but most do. Before you begin your search, familiarize yourself with the licensing requirements for collection agencies in your state. This allows you to speak intelligently about your state’s requirements during interviews with agencies.
Check with the agencies you are speaking with to make sure they meet the licensing requirements for your state, especially if they are located elsewhere. They must confirm that they comply with the rules of the Fair Debt Collection Practices Act.
You should also check with your Better Business Bureau and the Commercial Collection Agency Association for the names of reputable and reputable collection agencies.
Understand how they will work for you
While you might pass this debt on to a collection agent, it still represents your business. They need to know how they will represent you, how they will work with you and what relevant experience they have.
When considering collection agencies, ask them what tactics they use in their collections process. Just because a tactic is legal doesn’t mean you want to associate your company name with it. A reputable debt collector will work with you to create a plan you can live with that will treat your former clients the way you would like to be treated and still get the job done.
Sometimes debtors go out of town, and one tactic used by many is skip tracing. This means they have access to specific databases to locate a debtor who has not left a forwarding address. This can be a good tactic for specifically asking about it.
You should also delve into the collector’s experience. Have you already worked with companies in your industry? Is your situation outside of their experience or is it something they are familiar with? Relevant experience increases the likelihood that their debt collection efforts will be successful.
You should also discuss with the collection agency how they will work with you. You should have someone to communicate with and get updates from. You should be able to articulate clearly what is expected of you in this process, what you need to provide and what the cadence and triggers for communication will be. Your chosen agency should be able to meet your chosen communication needs and not force you to accept theirs.
Are you insured?
If an agency does not speak openly about its practices and you later discover that it is being overly aggressive, that agency and possibly your company could be sued by the debtor.
Regardless of whether you win such a case or not, you want to be sure that your company is not left behind. Get proof of insurance from any collection agency to be sure. This is most commonly referred to as error and omission insurance.
Be ready to pay
Debt collection is a service, and it doesn’t come cheap. In many ways, this is the last resort before giving up on unpaid bills entirely. It’s important to keep this in mind when discussing fees when hiring a collection agency.
In general, there are two payment structures that you can expect when speaking to a collection agency.
Payment upon collection: In this model, the company works to collect the debt and pays your company when the collection is done. Your fee is usually a percentage of each bill. The crux of the matter: If the collector pays less than the invoice amount, the brokerage fee does not drop.
For example, let’s say you negotiate that 25 percent of each invoice is withheld by the collection agency. If you have an invoice for $1,000, the agency fee is $250. However, if the collection agent negotiates a $500 settlement with your customer, you only see a quarter of the original invoice amount.
Purchase of receivables: This is the least complicated method, but it also requires the debt collector to take the greatest risk. Therefore, this model tends to be the more expensive variant.
When a collection agency buys your debt, they pay you a percentage of the outstanding bills. If you have $50,000 in unpaid bills, an agency might pay you $15,000 to buy them from you and then proceed to collect the unpaid amounts. Any money they raise is now theirs.
Hiring a collection agency can help you recover lost income from bad debts. But businesses need to be careful when hiring a debt collection agency to ensure they are properly licensed, experienced and represent your business well. Debt collection can be costly, but the amount you get from unpaid bills can be worth it.
Can you break your contract?
Once you’ve signed an agreement with a collection agency, breaking it can be difficult, but not impossible. Check your contract for a cancellation clause. If not, contact the agency and negotiate such an arrangement directly.
A termination clause could allow you to terminate the contract by paying a fee or by terminating within a specified period of time. There may be a time limit in the agreement by which, if the agency has not delivered, you can issue a fallback clause. Or if the company comes up with a fraudulent agreement, you can break the contract in general. But you should consult a lawyer first.
A material breach of contract may be grounds for termination. For example, if they fail to comply with key points of the contract, you may be able to break the agreement. Or you can simply ask the company how much the cancellation fee is.
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