Though offering customer lines of credit has become standard practice among small businesses across various industries, many businesses these days are finding themselves rich in outstanding receivables, but poor in cash flow. When in-house debt collection fails to reign in unpaid customer debt, a small business may want to consider hiring the assistance of a professional collection agency.
When to Use a Collection Agency
If you are on top of your billing process, then once a bill is overdue it should set in motion a series of actions, such as sending out statements and collection letters and making phone calls. If the debt remains unpaid after a reasonable amount of time has passed (usually between two to three months past the due date), then it should be handed over to a collection agency.
Keep in mind that timing can make a big difference when it comes to collecting on overdue accounts. Statistically, the likelihood of collecting on an unpaid account drops to 73% after three months have passed. If the unpaid account is over three months, then the probability of cashing in drops dramatically to 57% after six months, and to only 29% after one year.
What to Look for in a Collection Agency
Collection agencies are in the business of collecting unpaid debt, so they generally have the tools and the knowhow to get the job done. But not all collection agencies are equal.
The first thing you need to do is make sure that the collection agency is either a member of the Association of Credit and Collection Professionals or the Commercial Law League of America. Both of these organizations require that their members adhere to a strict code of ethics and business practices. Member agencies are also required to maintain a bond in the minimum amount of $300,000 for the protection of the companies they serve.
The next major factor is the collection agency’s recovery rate. You need to find out the percentage of unpaid debt that the collection agency expects to return to you. You should ask the collection agency to provide you with its “net back” figure. Net back means the amount of money returned to a company from the unpaid accounts after the agency has received its fee.
You should also ask the collection agency to give you a list of references. You could place a couple of calls to the businesses on this list and find out how satisfied they were with this particular agency.
When All Else Fails…
If you try to recover a debt, but are unsuccessful, you may be able to claim part of the loss on your tax return. (Tax Code IRC 166, Reg. 1.166). You can not deduct any lost profits, nor money owed for services rendered, but you will be able to deduct the cost of the goods sold.