Going After Overdue Accounts When those invoices just aren't getting paid, you may have to hire a collection agency. Here's how to find the right one.

Introduction

Nothing reduces a business's cash flow like unpaid bills.Particularly in a small business, tracking down the guilty partiesis both a financial and physical drain.

To recover owed money, many businesses turn to collectionagencies. These organizations specialize in collecting payment fromoverdue accounts.

Most firms bring in collection agencies for debt that is abouteight months old, although a few bring in agencies after only threemonths.

This guide is designed to give you the facts you need to hire acollection agency for your business. The various sections arelisted in the box above. You can choose to read this guide frombeginning to end, or jump directly to a section of interest.

How Agencies Work

Collection agencies can attempt to collect on bad debts in twoways:

By mail and phone

For larger debts, they will typically send letters and makephone calls to the delinquent account.

By mail only

Smaller debts may not justify the cost of phone calls, limitingthe collection agency to simply sending threatening letters.

Choosing a Service

Choosing a collection service is tricky, since it's hard topredict a firm's success with delinquent accounts ahead oftime. A few areas to investigate when choosing a collectionservice:

Method of collection

You should examine the letters that will be used and judgewhether they will be effective with your customer base. Also askabout the training that telephone collectors receive to ensure theyunderstand the Fair Debt Collection Practices Act.

This 1977 act requires that debt collectors treat debtors fairlyby prohibiting certain methods of debt collection.

How the service will work with you

Be sure to find out:

• how information about delinquent accounts will be transferredto the agency.
• when collected funds will be forwarded.
• what reports are provided detailing the collection progress andsuccess rates.
• how you can stop collections if you receive payment or creditan account.

How they handle skiptracing

This is particularly important when collecting from individuals.Skiptracing refers to how the firm finds debtors who havedisappeared and can no longer be directly contacted. Agenciesshould have access to online search capabilities and telephonedatabases to help locate these debtors.

Reputation of the firm

Make sure to check references, particularly from clients thatare in a similar business. Also find out whether the firm complieswith state licensing or bonding laws.

Before Hiring an Agency

There are several actions you can take to reduce the amount owedto you before resorting to an agency.

Be careful when offering credit

Carefully check credit references of each new account anddon't extend more credit than the firm can handle.

Explain transaction terms thoroughly

When extending credit, make sure that accounts know when youexpect payment, and clearly detail any credits or penalties forearly or late payment.

Follow up overdue accounts

Do not expect customers to police themselves; instead, make sureto promptly send statements and reminders of payment due dates.

Institute a series of overdue notice

You should schedule regular written and oral reminders beforeeven considering a collection agency. This will not only help savemoney, but will also avoid the ill will that can be generated whenusing a third party to collect the funds.

Set an absolute due date and stick to it

As a final step, set an absolute due date before the account isturned over to a collection agency. Do not extend this date, but dogive the debtor warning of this final payment date.

Pricing

Debt collection is usually done on a contingency basis. Thismeans that the agency keeps a percentage of money that is collectedfrom a debtor. Depending on the size of the business, commissionscan range from 10% to 50% of the recovered amount. Other agenciesrequire an upfront fee and then take a lower percentage of therecovered amount.

The advantage of contingency billing is that you do not pay foruncollected debts. However, some agencies will not offercontingency services for small debts. In these cases, you willtypically pay a fixed fee for a series of letters or calls.

Buying Tips

Be thorough

When assigning a third party to collect an overdue account,provide them with all the information you have about the debtor,including an itemized breakdown of all contacts between yourorganization and the debtor's business or home.

Make sure the agency you choose is licensed

Some states require collection agencies to be licensed in theirstate before they can pursue debtors. Contact the AmericanCollectors Association (612/926-6547) or a particular state'scollection agency administrator for specific details on staterequirements.

Get more than the P.O. box

To increase the agency's chances of tracking down anindividual or business, always ask for the customer'sphysical address (even if you are sending the materials to aPost Office box), phone number and social securitynumber. It can also help to work with a credit reportingagency. All of this information will be helpful in trackingdown individuals even if they have closed their P.O. box or changedtheir address and phone number.