Small business owners can lower debt collection costs. It does not happen on its own, however. It takes planning and a commitment to the plan.

Make Informed Credit Decisions

The first step is due diligence before you even provide your product or service. If you are going to grant credit, and you should, gather information (via credit application) and make an informed credit decision. Not all customers should receive the same credit terms. Some customers should provide a deposit up front, while other should be cash customers only. Do your very best to determine which customers get which credit terms. Monitor customer credit positions monthly and adjust if necessary. This step can lower debt collection costs by limiting the number of files that will become delinquent.

Contracts can lower debt collection costs

The second step also takes place before the business transaction. Each credit customer must have a written contract that details payment terms. If you communicate your payment terms clearly and if a customer agrees to them in writing, you can lower your debt collection costs by limiting customer disputes which once again will mean fewer files to collection.

When we receive a new file for collection, our customers often want us to collect our contingent collection rate(percentage of debt we charge for collecting the debt) from the customer as well as the principal debt. We can often do so if (and only if) the customer has a signed contract with a clause allowing recovery of debt collection costs. Various states laws and other factors may limit how much of the debt collection costs can be recovered. However, without a contract a collection agency cannot legally recover costs. If you are not willing to plan and include this clause in your contract you cannot blame your agency when they are not able to recover costs for you.

Have a system to recover debt in house and stick to the plan

You or the person you designate must be responsible for the regular review of accounts receivables outstanding and drive the process to bring the money in. A collection letter and follow up phone calls do wonders. Also, as a last resort, offer a small limited-time offer discount at  rate lower than what your collection agency would charge. The discount should be conveyed to the customer as your best, last effort to avoid sending the file to collections.

So, with some planning, and with a consistent approach to accounts receivable management you can lower your debt collection costs. And, although even for the files that you do have to refer, you have a better opportunity to maximize your recovery.