Small and home-based businesses cannot escape the likelihood of dealing with bad debts. Whether an uncollected bill is the consequence of legitimate economic hardship at the client's end or her being a routine nonpayer, debts must and should be collected before business starts feeling the shortfall in funds. Business heads need to consider a sensible action plan to manage this situation effectively.
Collection agencies are a good choice for small and home businesses without the required staff and resources to collect outstanding invoices adeptly. While an infrequent unpaid debt can be adjusted in the business operating expenses, too many unpaid bills take a toll on the cash flow. If the total cost of the bad debts is adequate to justify the price of hiring a collection agency, it is your best shot at getting your money from delinquent customers.
Guidelines for hiring a collection agency
A debt collector works on your behalf and it should respect your policies and customer service standards. The way customers see it, the collection agency is a representative of your business and their experience with the agency will definitely have some effect on your customer relationships. Therefore, you should evaluate a few important points while selecting a debt collection agency, such as:
* Experience working for similar business size and type: Look for a collection agency that has some experience with small and home-owned businesses and how they operate.
* Experience with collecting from similar businesses: A collection agency that has previous experience working with customers often seen by businesses of your type and size has a better chance to succeed. Individual debtors and commercial defaulters are totally different and have to be handled differently.
* Skip tracing: Many times, clients move without leaving a forwarding address or get their phone lines disconnected. Collection agencies use skip tracing - accessing many databases - to track down debtors and communicate with them over the unpaid bill.
* Collection strategies followed: Verify the collection agency's collection strategies. If the agency has achieved reasonable success by mailing letters to debtors, scrutinize them yourself to make sure the content complies with the Fair Debt Collection Practices Act. This safeguards your customer relationships. Respectfully yet strongly worded communication can get clients to pay the debt and also keep doing business with you.
* Errors and omission insurance: Collection agencies and hiring companies are insured from liability by the Errors and Omission insurance if unhappy debtors file a suit against the strategies employed to collect the owed money.
* Licensing issues: The collection agency should have the legal right to collect debts in areas inhabited by the customers. Otherwise, the collection agency and business being serviced can be charged for illegal collection without a license.
* Collection agency rates: Debt collection agencies work on fixed charge or contingency rates. The contingency rate is a percentage of the total overdue amount collected. You should verify the collection agency's success rate and contingency rate before picking the pricing option. Calculate the cost of service in both cases - fixed versus contingency, and select the one that falls more economical.
Bad debts weigh down every business but they can are particularly risky for home and small businesses that rely on regular cash flow to maintain operations to keep them going when strapped for cash. Collection agencies are a sensible choice as even after paying for their professional services, you end up with a sizable percentage of the collected amount.
