October 16, 2012 by Rick B
When someone asks me what kind of business I am in, I usually respond by saying, “Debt collection and accounts receivable management.” Halfway through those 6 words, I typically see the eyes of my audience glaze over. Part of this glazed over expression (and only part) is that most people do not understand what the collection business entails.
This week we are going to discuss debt collection, and do our best to effectively communicate what goes in to serving our clients. This week we’ll discuss the collection process, next week we’ll dive into accounts receivable management (we don’t want to have all our fun at once!).
Generally speaking, people understand the debt collection portion. It is fairly straight forward; when an entity has an accumulation of past-due receivables, or when their past-due receivables reach a certain age, they turn them over to a 3rd party (collection agency) to recoup the money they have earned. The collection agency will work to recover this money and will typically be paid a commission based on the amount they collect.
A full service debt collection agency will have highly developed programs and processes in place to collect your past-due receivables. Below, is a list of typical debt collection programs that can be combined to create a very effective and efficient debt-recovery solution.
Pre-Collect: When it comes to paying a bill, some consumers just need a little encouragement. Pre-Collect is a letter, or series of letters, that serve as a friendly reminder of a past-due account that needs to be paid. This is a very economical way of recovering past-due A/R; it’s simple, inexpensive, and highly effective.
Core-Collect: As the name implies, Core-Collect is the essential program in any debt recovery solution. Core-collect is an all-encompassing program involving automated and manual telephone calling campaigns, written correspondences, skip tracing, credit bureau reporting, and if warranted (and approved by client) litigation.
Second-Collect: If you have made use of a collection agency in the past, chances are they did not collect on 100% of the accounts you sent them. Disregarded, these accounts can add up to a significant amount of lost revenue. Utilization of a second agency offers both a new voice, and new techniques that can lead to payments on these older and often times forgotten accounts.
Litigation: When all traditional collection methods have been exhausted, you may choose to litigate in order to obtain payment. This is where an experienced collection agency can be worth their weight in gold. Before litigation is recommended, an extensive employment and asset search should be conducted—an experienced debt collection agency will be able to conduct these searches on your behalf, and at no out-of-pocket expense to you. If the aforementioned searches identify the consumer has the ability to pay their debt, litigation may be recommended.
Combining all or parts of these four programs can accelerate your revenue cycle and improve cash flow as your bad debt decreases. All but one (Pre-Collect) of these programs are generally offered on a commission-based basis, meaning if the agency does not collect, you don’t pay. Be wary of any agency that asks you to front the cost of collections. After all, this is about increasing your cash flow. Check back next week when we discuss how a 3rd party can efficiently manage your entire A/R process.