Collection agencies may not charge you anything up front, but they are not free. Generally, collection agency fees are a percentage of funds recovered. Rates vary, usually based on age or size of debt, or both.
Certainly, hiring a collection agency with a competitive rate is a good thing. However, the lowest rate means nothing if your agency does not perform for you. Small business owners often make the mistake of focusing solely on the rate and overlook some important other costs.
All too often, business owners wait too long to get collection agencies involved. It is a great idea to have procedures in place to manage your accounts receivables and follow up on late payments. However, if you have not received a response within 90 days to your collection letter and phone calls, get help! Waiting any longer makes no sense and could hurt you.
Here is an example. I received a phone call from a prospective client, a small subcontractor. A customer had refused to pay them for an invoice over $2,000 – a large hit to their cash flow. I did not hear back on my proposal to them until 9 months later. At that point, the opportunity to file a mechanics lien, a powerful collection tool, had long passed. Delay had cost them.
Here is another example. This week, a business owner in California asked me to collect a $1,000 small claims judgment obtained in Connecticut. In discussing the case, I learned that the business owner, who wanted to save collection costs by filing the small claims herself, did not realize when filing the case that she would be expected to come to a court for a hearing. She spent a considerable sum in airfare and hotel to come east for the hearing and the defendant did not show. So while she was granted a default judgment, she now has to collect it. She has nearly $750 of costs and has not recovered a cent. Her plan to save money on a collection fee backfired.
Another hidden cost of debt collection is the cost of time spent by staff pursuing delinquent clients that could be spent selling new customers or focusing on other business activities. Time is money and the cost of hiring a collection agency pales in comparison to the cost of your time.
Some business owners would rather borrow money than collect their accounts receivables. Other small business owners are in a cash crunch because they are not being paid, and pay finance charges to their creditors because they do not have the cash flow to pay on time.
Again, collection agencies are not free. They are however, far more reasonable that you would think, and certainly worth it for their ability to improve your cash flow and save you time.