The cost of debt collection is often misunderstood. One question that continually comes up in small business is the cost of collection, which is the contingency rate – a percentage of sums recovered. The rate varies from 25-50% depending on many factors, but mostly on the date of service or invoice. The idea is, older the fish, more work to collect and thereby the higher rate. The real news is, if we collect nothing, there is no fee, cause, and this is the real kicker, 25% or 50% (or any rate) times of $0.00 is ZERO!!!!!!
Too many small business owners consider only rate when hiring a collection agency. It is a good business practice to negotiate a competitive rate. However, once you hand a file off to a collection agency, live with your decision and focus not on the money you are “losing” but what you are recovering.
The truth is that the loss has the loss has already occurred. An unpaid office is worthless to you. You called me. You called me because you have realized that you may have nothing, or at the very least something less than the value that is shown on the face of your invoice.
Business owners often suffer from the delusion that there is in fact a value associated with the piece of toilet paper that they are holding. I call it toilet paper, because its value as toilet paper is less than toilet paper. At least with toilet paper, real toilet paper, you can do something with it. An invoice, printed on a piece of copy paper, purchased from Staples is worthless. There is no value. You cannot use that invoice to pay your own bills. The person on the other end of the invoice is not paying. For whatever reason, the “bad guy” does not wish to honor the obligation associated with the invoice, making the invoice worthless.
Here is a real-life example. Our client, a tech company, was owed $7500.00 of work done by a tech company. It remained unpaid for years and the client held onto it, always hoping, spending it in his mind. When the client finally relented and gave up the idea that the “bad guy” was going to pay, he called. The good news is the client came to the realization that he may be holding a ZERO VALUE. The bad news, it was beyond the statute of limitations, the legal time limit for collection. The value was zero, and there was no legal means to get paid. The worse news is that the “bad guy” had means: real estate, property, income from a business, which could have been have been secured by a Small Claims Court judgment has we gotten involved earlier, but meant nothing because of the statute of limitations.
The lesson to be learned: if you are not paid in 90 days of the date of the invoice, you have a problem, and with each passing day, the problem gets worse. Waiting and hoping are the kiss of death to associating value to your invoice.