Reducing Cost of Collection with a Customer Contract

Posted by Marilyn Miller on September 25, 2017  /   Posted in Uncategorized

Reducing cost of collection is important to businesses. It is bad enough to have a customer default on paying you. When you have to send a customer to a collection agency, it adds insult to injury.

My first suggestion would be to shift your thinking from holding on your receivable to recovering as much as you can. Accept that you have not been paid, and ask an expert to step in and help. Something is better than nothing. Obviously, you want to get a competitive contingency rate, but do not focus on the rate alone, and make sure you know which services are and are not included in the rate.

Do not hold to your files hoping that the money will just magically come in one day. If you have not heard from a customer in 90 days, you have a problem. Remember that the longer you hold a file, the more likely your collection agency is going to charge you a higher rate.

The most important tool for reducing cost of collection is  to pass those costs along to your customers when their files are referred for collection. You can do that if (and only if) your customer contract specifically addresses the issue. You must have a customer agree in writing beforehand that they are responsible for costs of collection. If you do not have it in writing, you cannot pass along the costs.

Sample language might be as follows:

If your account is referred for outside collection, you agree that you will be responsible for and all costs of collection including but not limited to collection agency fees, attorney fees, cost of suit, court fees. 

We recommend you ask your attorney to draft the language that is right for your business and your location.

Your ability to recover the costs of collection will be limited by three factors:

State laws – Some states allow full recovery. Some states allow only a percentage of principal or nothing at all.

Type of collection – Your state might have different laws for consumer versus commercial collection.

Court order – A judge or magistrate may or may not be willing to allow you costs.

However, you have NO chance of reducing cost of collection without this language. Make it a priority today to get it into your customer contract.


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