The cost of debt collection is bothersome to small business owners. They do not get paid, which in and of itself is bad enough. Then, to add insult to injury they have to pay a collection agency to recover the money for you.
There are a number of good collection agencies out there. Most agencies work on a contingency basis, which means that they do not charge a fee upfront and retain a percentage of whatever they collect. It should be easy to get a competitive contingency collection rate, but you need to be careful to know what is and not included in the rate. Beware of extra charges for things like research, which should always be included in the rate.
There are also some other ways that you can control your cost of debt collection:
Stay on top of your receivables and have a system in place to collect as much as you can on your own.
Use a collection letter in conjunction with your invoices.
Offer clients a small discount to customers (lower than the rate your agency charges) on a “limited time only” basis. You will be surprised how a discount of 5% of 10% will bring in additional payments.
If a customer ignores you for more than 90 days, send it to your collection agency without delay. The sooner you send a file to a collection agency (after your best efforts to collect on your own) the better.
Use your customer contract to apply finance charges to overdue balances. You have to have a signed agreement to do this. If you do not have one, call your attorney and get one today!
Use your customer contract also to recover all or parts of the collection costs from your customer. The cost of debt collection can often be recovered by your collection agency if you provide them with a signed customer contract that allows for recovery. Your agency’s ability to recover cost of debt collection will depend on the types of debt (consumer vs business) and the laws in your state. You collection agency should know what is and is not recoverable. However, once again – you have no chance of recovery without a signed contract.
As you see, controlling the cost of debt collection is easier than you think. All it takes is a little planning and the a steady, consistent focus.
