Collection Services: A good recovery strategy is important as some bad debts are unavoidable
Businesses cannot help incur bad debt in the customer acquisition process by extending credit. Some customers take advantage of this service by delaying payments or even waiving debts.
Bad debts tend to accumulate unless they are dealt with immediately. The delay in recovering payment is usually because the creditor is unwilling to play “bad cop” with customers. The desire to maintain good customer relations makes companies lenient in debt collection. The longer a debt goes unpaid, the lower your chances of paying it off.
Businesses can choose to collect bad debts themselves or subcontract the work to a collection agency. Some of the debt collection techniques are discussed below:
Internal staff for debt collection.
The company can assign the task of collecting the debt to the company’s Accounts Receivable department. The department is responsible for sending demand letters to clients, making calls, and following up on debt.
The Accounts Receivable department is bogged down with its own work and may not give debt collection due priority. Also, the department is not really trained in debt collection strategies or debt collection law. Unprofessional handling of debt collection can cost the company its client or, even worse, cause legal problems.
Hiring a Collection Agency
Collection agencies are experts in the art of collecting debts. They have trained professionals who work in accordance with the Fair Debt Collection Practices Act (FDCP Act) ensuring that clients are treated courteously.
The first task of a collection agency is to send a notice to the client. The notice is similar to a demand letter, except that the client takes it more seriously. The fact that the creditor has taken the help of a third party agency to recover the debt is enough to make many clients pay. The fear of losing their credit rating also encourages customers to pay off their debts.
The demand letter states the name of the creditor on whose behalf the collection agency is acting, details of the debt, the total amount owed, and the payment due date. The collection agency accompanies the demand letter with a call explaining the demand letter and advising the customer to make the payment by the specified date.
Some of the strategies employed by collection agencies are:
call customers
Collection agencies call customers to follow up on payments. The calls are friendly and the collection agency’s intent is to build a good relationship with the client. The collection agency’s attitude plays an important role in gaining the client’s cooperation in debt settlement.
jump stroke
Collection agencies use skip tracking to locate customers who cannot be reached at the address, phone numbers, or email ids provided to the creditor.
forwarding
Collection agencies refer a client’s account to another collection agency located in the client’s local region, if they do not have the right to do business there.
Debt purchase or flow forwarding
Collection agencies may have a contract with a company to buy your bad debts periodically. Creditors sell debts at a low market rate, to obtain a portion of the debt instead of losing all of it. After the debt is purchased, collection agencies contact the debtor and try to recover as much of the debt as possible.
Bad debts can be minimized at an early stage if companies have an efficient credit management policy. Clearly stating the payment terms in the customer contract, sending regular account statements, calling customers, keeping accurate records are some of the activities that the company can handle internally. Businesses can then make an informed decision about whether to collect the debt themselves, hire a collection agency, or proceed with legal charges against the customer.
