If you’ve got a customer with significant outstanding invoices, and you’ve done all you can as far as calling, sending letters, and trying to arrange personal meetings to arrange a payment solution, your next step may be to involve a debt recovery professional.
There are two options when it comes to hiring debt recovery assistance: a debt collection agency or a lawyer who specializes in debt collection. And there are several factors to consider when choosing the option that will best serve your business.
When to hire a professional
First consider the amount the delinquent customer owes. Hiring a collection professional for a minimal debt is impractical. But you have to decide what a practical cut-off amount is for your company … $100? $500? $1,000? Also consider how important it is to your business to have this particular customer pay back the debt in question. If it’s someone you never plan to do business with again, hire a collection professional as soon as possible. If it’s a long-term customer you’d like to retain in the future, you may want to continue trying to work out payment arrangements with them privately.
A good rule of thumb is to get serious about collections when an invoice is 90 days delinquent (120 days after it’s sent out). But number of days isn’t the only indicator that you aren’t getting paid. Aside from missing payments, there are other warning signs a customer is not planning to pay. These include:
• Relocating without submitting a change of address with the postal service
• Refusing to respond to your phone calls, bills or final notice letters
• Denying that he or she owes you money
• Disputing the quality of service provided in an attempt to justify refusal to pay.
If your debtor shows any of these signs, you may not want to wait past 30 days to hire a collection professional. Time is of the essence because, in general, after three months you can expect to collect only about 75 cents of every dollar owed. After six months the amount drops to about half. After a year you’re lucky to get a quarter of the delinquent amount.
The Collection agency Route
Collection agencies essentially do the same things you do when a customer is delinquent – make calls and send letters – however, they have the time, personnel, equipment and technology to do it efficiently and effectively.
When it comes to technology, make sure the collection agency you hire employs skip tracing. This means if your debtor moved without leaving a forwarding address and has disconnected the telephone, the collection agency can access databases to locate them.
Also make sure the agency you are considering is licensed in the states where the debtor is located. You don’t want your debt illegally collected through an unlicensed agency.
Finally, verify the collection agency has errors and omissions insurance. This protects you and the collection agency if a debtor sues over tactics used to collect on behalf of your business.
The cost of hiring a collection agency varies, depending on the amount of business you bring them as well as the amount of debt in question. Most agencies keep 25 to 30 percent of the amount they collect, but it can go as high as 50 percent.
The Collection Attorney Option
The main difference between a collection agency and a debt collection attorney is that the latter can ultimately take your delinquent customer to court. If the debt is large enough to sue over and you are willing to go the distance and take the delinquent client to court, hiring a collection attorney from the beginning makes sense.
A collection attorney may charge an hourly fee, retain about one-third of the amount recovered, or both. Some attorneys have a set minimum fee, or require the debt be of a minimum amount. Court-related fees and any other charges related to a lawsuit will be your responsibility. Considering this, if you’re not willing to take your customers to court over a past-due account, then there’s probably no reason to hire a debt collection attorney.
More About Costs
Before you hire either a collection agency or collection attorney, ask firms you are considering to provide a client list. It may be a benefit to you if they have other clients in industries similar to yours. Meet the owner or manager of the collection agency, or the partner in the law firm before you decide. Consider their success rate, any upfront or hourly fees and the percentage of collections they retain.
If an agency’s success rate is 70 percent, meaning they collect 70 percent of every dollar they go after, plus they retain 20 percent of any amount they collect, and you hire them to help collect a $20,000 debt, they’ll retain $3,080 ($20,000 x 70% = $14,000 x 22% = $3,080). In other words, probably the most you can expect to recover of a $20,000 debt you put in this agency’s hands is $16,920.
To avoid any surprises, get rates in writing up front. It’s not always wise to base your decision on which firm comes in with the lowest rates, however. There is an argument to be made that the agency that keeps a higher percentage of any debt it recovers will be more motivated to bring in the cash.
