Collection Agencies

By Eric Michaels

Businesses walk a fine line when debts from clients go unpaid for months. Is it time to increase the pressure? Or, if you do press for payment, will you risk losing that customer or vendor relationship? The best way to handle the issue is to decide what collection amount is your tipping point - after debts reach this point, it becomes worthwhile to pay for a debt collection agency to help you collect what's owed.

Differences Between Online and Traditional Debt Collection Agencies

Most people are familiar with traditional debt collection. These agencies contract with businesses to collect unpaid customer debts and will usually have a local office. In return, the collection agency keeps a percentage of the amount collected. Most traditional agencies are paid on a commission basis, so their fee is taken out only if the money is collected.

Online debt collection has automated much of this process. Businesses go online and fill out a form listing what debts they need collected. Online services vary; some offer flat fees per account collected or charge a fee for certain services in a la cart fashion.

The fees per debt collection request can vary between companies. However, some companies charge upfront fees, regardless of whether the debt is collected or not. These upfront fees can end up costing businesses more money on top of the loss they may have already incurred through bad debt. Traditional debt collection agencies generally have no initial costs. They collect fees only if they collect on the debt, and their fees are also percentage-based. That way, small collections have small fees.

For most businesses, choosing between online and traditional debt collection comes down to cost and personalized service. The big selling point of many online companies is that everything is done online. However, many traditional debt collection services also use the convenience of the Internet.

In reality, by filling in the information online, a business owner is saving the online collection agency time and labor costs, while increasing his own time commitment. Consider also whether there are any upfront fees that are payable regardless of collection performance.

Traditional debt collection agencies are motivated to collect debts because they don't get paid unless they are successful. There little no financial risk involved in this process. Traditional agencies are often locally owned and operated, which can make them more effective in the collection of local debts. In addition, many traditional agencies also offer online account access, so their clients get the best of both worlds.

The Four Debt Collection Stages

When you're dealing with a late-paying customer, choose a debt collection company that moves properly through the debt collection stages, starting out with "soft" tactics and moving through the more aggressive stages as needed. Following the rules of debt collection also reduces the chance of being accused of abusive debt collection tactics.

Stage One

Starting with soft collection tactics increases the chances of getting your money quickly without alienating the customer and driving away future business. At this stage, when a debt is between one and 30 days overdue, it's best to trust that the late payment is an accounting oversight or small cash-flow problem on the customer's part. Keeping the lines of communication open increases the odds that you'll receive your money as quickly as possible.

This stage generally passes without the aid of a debt collection service. If you do hire a debt collection service in this early stage, make sure the company starts by approaching your customer with friendly calls, emails, and letters reminding him or her of the debt and offering payment arrangement terms to get it paid as quickly as possible.

Stage Two

Thirty-one to 60 days have passed at this point, and your collection agency should begin to be a bit less friendly, and a touch more aggressive. Emails, letters, and phone calls should continue in stage two, but at this stage it's time to mention reports to credit bureaus. This is also when it's time to start tacking on fees.

Stage Three

Stage three begins at 61 days past due and continues through 90 days. Phone calls, emails, and letters increase in frequency and aggression, including threats of legal action. If it hasn't already happened, this is the point at which a debtor's account is closed, a negative report is made to credit bureaus, and fees and interest begin to accrue.

Stage Four

After 90 days, your agency should proceed to stage four. This is when you can charge off debt to a debt collector, take your former client to court, and seriously damage his or her credit. This is the last and most serious of the four debt collection stages.

Because the steps start with the assumption that an honest mistake has been made and gradually increase in hard tactics, your customers feel more respected when you choose a debt collection service that moves properly through the stages to collect debt. This means you have a better chance of repeat business from customers who had a temporary cash flow problem - as well as a better chance of collecting the monies owed you.