Startup - 6 Must-Know Facts on Hiring a Debt Collection Agency
A debt collection process for your startup is critical to your startup’s cash flow and reputation.
If you've done everything within your power to collect on past due invoices, with no success, consider hiring a collection agency.
A collection agency is a company used by lenders or creditors to recover funds that are past due, or from accounts that are in default. Often, a creditor will hire a collection agency after it has made multiple failed attempts to collect its account receivables.
In this article, we'll explore six key considerations when selecting the right collection agency, for your needs.
1. Understand the costs:
Did you know that 25%-50% of collected payments go to the debt collection agency?
When you are shopping for a debt collection agency, make sure that you understand all the costs associated with it — the financial costs and any cost to customer relations. That is right. Once you send your customers to a collection agency, you probably won’t do business with them again. So make sure that is your intent before sending your customer’s to the collection agency.
2. Check their work process:
If you choose to use a debt collection agency, you still have the choice to work with the ones that can help you manage customer relationships during the process.
Ensure that you select an agency that has a reputation for maintaining customer relationships and has a clear work process. For example, most agencies will try to email or call for debt collection first; if there is no response, then they will send letters.
Review their work process and even the letter and email template to ensure you are comfortable with the wording. You don’t want to see any language used in the collection process that is contradictory to your company image!
3. Relevant industry experience:
Experienced agencies might cost a little bit more and charge a higher percentage of collected money (i.e., 35%); however, it might be worth the extra cost for you. Collection agencies, with experience in your industry, understand your customers’ buying cycles, and how to get the payments back for you legally.
Ask questions, such as “What are the unique challenges for debt collection in your industry and how they have dealt with them?” and “Are there any local laws that I should be aware of?”. When possible, ask for a few preferences for the companies that they have worked with.
4. Manage your expectations:
You may be surprised to learn that a collection agency doesn’t typically sue anyone; rather, they intimidate and -- in some cases -- file the paperwork to credit bureaus. It is very common that you still need a lawyer when it comes to a large unpaid invoice.
A word to the wise: Don’t expect that the collection agency will do everything for you; you will still need to participate in the process and sometimes hire for more help.
5. Do It Now!
The longer you wait to collect debt, the slimmer chance you will have to collect it. Statistically, you will lose between 12-15% of collectable debt each month after they become past due. To provide you with an example, roughly, only 65% of debts go unpaid after 3 months are still collectible.
So, do it now! Engage with a collection agency early so you have the best chance to still get your money back.
6. Use an app to do all the collection work for you:
We hope you are not overwhelmed with the whole collection process. If you are, don’t worry, we recommend using CollBox as a collection tool to make things easy. CollBox takes the manual work out from the collection process and matches you with the most suitable collection agencies.
CollBox interviews and selects the reputable collection agencies, categorizes them by industries, and measures and rates them by their performance. Better yet, they document the efforts made on collections, such as the time they called, emailed, the conversation, etc. This saves your accountant time, and will be handy when it comes to an audit.
Now, if you still can’t collect the payments, you will have no choice but write these invoices off as bad debt. The financial impact of increased bad debt is: lower revenue, lower net income, and therefore less taxes to pay for your startup. Make sure to record the bad debt in your company’s accounting book when filing taxes, so you don’t have to pay the unnecessary taxes.
Takeaway:
That’s it! You want to start the debt collection process as soon as possible; know the costs and manage your expectations on how much can be collected; pick the collection agency with the right work process and relevant industry experience; use CollBox to take the manual process out of the collection.
We hope that you find these six key considerations for selecting collection agencies useful. If you still have questions, we’re here for you. Book an appointment with us today!
