Debt Collection Costs: Smart Ways to Control Them

Posted by Marilyn Miller on September 02, 2016  /   Posted in Uncategorized

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Debt collection costs can be significant. However, the cost of recovering money owed to you should not keep you from doing it, because you can control the costs.
There are many good collection agencies out there, so finding a competitive rate should be easy. However, it is a mistake to hire a collection agency solely based on the lowest rate. Look carefully to make sure that you know which services the collection agency offers for the rate. If you are paying a flat fee of $39, rest assured your agency is not going to do more than send a letter or two. The process of debt collection includes researching debtors, or “skip tracing“, negotiating and documenting payment plans, and working through some customer disputes. How much is included with your rate, and what is extra? If legal action is required, are there extra fees?

Beyond fees, there are also things a business owner can do to lower their debt collection costs.

  1. Start every new customer credit relationship with a solid contract that allows you to charge interest on past due balances. Remember, if you do not have a signed contract, you are not legally entitled to interest. Many small business owners believe that simply stating your interest rate on an invoice is enough. It is not! In the strictest interpretation of the law, if you cannot prove the customer agreed to it, but it could be considered an unfair trade practice.
  2. A contract may also give you the right to recover all or part of your collection costs, including commissions paid to collection agencies, attorney fees and court costs. The amount you can recover depends on the type of debt (owed by a consumer or by a business) and the laws in your state. For example, the laws in Maine disallow, by statute, the addition of fees to any consumer transaction. However, if you have a contract, and you litigate successfully, you may be able to recover some attorney fees.
  3. Review your receivables regularly. Develop a template collection letter, or series of letters. Standardize your in-house collection process.
  4. Offer a small discount as a last ditch attempt to avoid sending a file to a collection agency. If you offer, say 10% off, you might just get paid, and the discount is less than what you would pay a collection agency. Be very careful to document any discount offers, and communicate them as a “limited time offer” ┬áthat will go away if not paid in the offer period.
  5. Do not delay sending files to a collection agency. If you have not been successful in 90 days, it is time to get outside help. Most agencies will charge you more for “aged” files, or older files. It is not easy to balance when to send a file out, but waiting too long can not only cost you more in fees, but there are “soft” costs too.

You can and should drive down collection costs. All it takes is planning and a commitment to the process.

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