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When Should You Hire A Collection Agency?

A collection agency may be just what you need to get your cash flow going again! And see what you can do to lower your chances of having bad debt.

Dean Kaplan

President at The Kaplan Group
Dean Kaplan is president of The Kaplan Group, a commercial collection agency specializing in large claims and international transactions. He has 35 years of manufacturing, international business leadership and customer service experience. Today, he provides business planning, training and consultation to a variety of global companies. You can read more advice from Dean on his blog at https://www.kaplancollectionagency.com/blog/.

A collection agency can help your startup stay afloat

Cash flow is critical for start-ups. Getting paid on a timely basis by customers is especially important for smaller companies with limited capital resources. So, when a customer does not pay on time and keeps giving excuses, this can have an outsized impact on an early stage company.

The annual survey by the Commercial Law League of America has shown for over 30 consecutive years that the likelihood of getting paid on a past due invoices declines over 1% per week.

Most people are surprised to learn how quickly they are headed to having bad debt. By the time an invoice is 90 days past due, there is already a 26% chance of a write-off. Within another 4 months the chances of collecting are down to one-half. Delay in responding to past due invoices is expensive.

Accounts Receivable Best Practices

There are several things a company can do to lower the chances of having bad debt. Here are some basics:

  • Do a credit review prior to giving customers payment terms
  • Have a signed contract, credit application or sales order with terms
  • Invoice promptly and accurately
  • Follow up the day after an payment was due but not made
  • Consistent follow up by phone, mail and email on past due invoices
  • Recognize when a situation requires special attention and take action

If a company has been diligent in trying to collect and an invoice has reached 90 days overdue, special attention is appropriate. By this time you should have heard all the excuses and experienced the broken promises. If your customer could not solve their internal issues in order to pay you in this time frame, most probably it will take some other effort to get paid. The sooner that gets started, the better chance there is of collecting, and the sooner your company is not spending valuable resources chasing old debts.

How Collection Agencies Work

Most collection agencies work on a contingency basis. There is no cost to the client unless the agency collects. The contingency rate a collection agency charges typically ranges between 15% and 33% of what is collected. Some agencies charge a higher percentage the older an invoice is, recognizing that they are more difficult to collect due to age.

Reputable collection agencies have a number of tactics that they can use to get paid. They enable client’s staff to remain focused on regular business while the agency devotes the time, effort and resources towards collecting old invoices. The sooner they start, the better chance they have of being successful.

In one sense, collection agencies don’t cost anything. Many larger companies with established credit procedures automatically turn invoices over to collection agencies when they hit 90 days past due unless there are specific extenuating circumstances. By this time, there is already a 25% chance of not getting paid. It is better to give a 25% success fee to the collection agency than keep spending valuable internal resources on the problem invoice and see the chances of collecting decline another 25% over the next few months.

Timing for Taking Special Action

If your customer has given you endless excuses, broken promises, is ignoring your calls and emails, or said they can’t pay until some special event such as raising money occurs, it is time to bring in a professional. By the time an invoice is 90 days past due, unless your customer has given you specific verifiable information as to what will trigger payment, a collection agency has a better chance of getting your money than you do. While it is painful to not get paid in full after an agency’s fee, getting 75% is much better than getting nothing at all.

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