Debt collection for a small business is a team sport. If one person tries to do it alone, the results will be limited. Worse still, if a team is not in sync and does not communicate, they work at cross purposes and chaos reigns.
When I perform debt collection for a small business, I want to be a member of their team and work closely with them to get the best results. Most of the time, it works well.
Most third-party collection agencies work on a contingency basis which means that they take a percentage of sums recovered. They make no money unless they get results. When a collection agency agrees to work to recover a delinquent debt, they take a leap of faith. The agency takes no money upfront because they believe they can recover the debt, and therefore earn a commission.
Imagine pricing your product before you know how much it is going to cost you.
When a collection agency begins to collect a debt, they do not know how much time and effort it will take. It could be one phone call or letter or many. There is simply no way to know. A collection agency generally charges more for older debts than newer ones, but even very recent debts can be difficult to collect. Agencies generally work to recover enough to some money for their customers and make a profit doing so.
Some agencies charge a small per file fee for collection. I have taken several accounts from agencies that use this approach, and have found that their percentage of debt recovered is pitiful. Why? Because if an agency only charges, say $20.00 to collect a debt, they can only afford to spend $20.00 (at most!) collecting it, which is to say, you get very little for your money. Plus you pay it up front, versus the contingent approach where you have no upfront expenditure. The contingency approach, in my opinion, is the only way to go.
So why do customers get mad at me?
Sometimes a customer believes that by charging a commission to recover money for them, I am taking some of “their money”. I get it – it stinks not to get paid. Your collection agency, however is not your enemy. They did not cause the debt to become delinquent.
Some customers get mad because they believe my rate is too high. Usually in this case, they have tried a per file fee, or a low rate, and gotten poor results. The debt has aged, making it more difficult to collect. My rate when I am not the first agency involved is higher, which is standard for the debt collection agency.
Another reason for a higher rate is that customers wait far too long before hiring me. I want my customers to do everything they can on their own, but after 90 days, it is time to bring in the experts.
Lastly, customers are upset when I have to tell them that I cannot add my fees to the debt. I can do it in some cases but not in others. Three factors drive my ability to pass costs along: contract, type of collection and state laws.
Without a contract, I cannot and will not add collection costs to the debt. A customer must agree in advance to pay any collection fees. If you wait until after you have done the work, to tell them they are going to pay your costs, it is too late. The agreement must be in writing.
The laws vary for collection costs on the type of debt, whether or not they are consumer (business to consumer) versus commercial (business to business). State laws also may limit the costs that can be passed on.
For example, Maine allows costs to be passed along to consumers if there is a contract, and if the debt is not a “credit transaction”, such as an auto loan or credit card. Connecticut, on the other hand, allows only 15% of the total owed to be passed along to consumers. In all cases however, no contract means no fees can be recovered.
So what should customers do instead of being mad at me?
A contract is the single best debt collection tool. Even a simple email that states your price and terms for payment, and states that you will pass along any collection costs works as long as the customer emails back their agreement.
Perhaps it is not possible for small business owners to always get a signed customer contract. I do know that they can be doing it more often than they are currently doing. If you are too busy or do not feel like bothering to get a contract, you cannot blame your collection agency for not recovering the costs.
So, don’t get mad. Get those contracts. Come up with a system to attempt in-house collection for 90 days and then get it off to me. I am passionate about your right to be paid.
Don’t get mad. Get paid. I can help.