Have any of these “myths” held you back from working with a collection agency in the past?
If there’s one key ingredient in the recipe for a business’s success, it’s getting paid for the products and services they provide. Revenue is the bread and butter of any business, and invoices (while great for record-keeping) don’t magically turn into revenue until a client issues payment. Knowing that it’s logical to wonder why so many business owners hesitate to take further action anytime invoices go ignored or unpaid.
In general, the term “collections” doesn’t have overly positive connotations and the third-party collections industry as a whole has a pretty bum rap amongst today’s business owners. Many collection agencies haven’t updated the way they engage with clients since AskJeeves was a legitimate search engine, which makes trying to work with them feel like more of a chore than a helping hand. Additionally, there’s no formal “rule book” for how collection agencies operate, which can make it feel incredibly hard to know if you can really trust an agency to represent your best interests. Many businesses (understandably) opt to take no action, rather than risk picking the wrong one. Nonetheless, working with a reputable collection agency is the fastest route to resolving outstanding customer debts that a business can take. In order to combat some of the uneasiness felt about collections, we thought we’d shine a light on a few of the most frequently encountered gray areas that stop businesses from moving forward with the process. Read on as we debunk the 5 most common collections myths!
#1: Placing a debt in collections is the same as selling it at a loss. It’s easy to understand why this myth exists. There are companies out there that buy old debts from businesses who are looking to offload them, for a fraction of the original amount owed (known as “debt buying”). It’s important to note that debt buyers and collection agencies are not the same things. In collections, a business isn’t selling anything. Instead, they’re agreeing to let a collection agency try to recover money owed, in exchange for a percentage of the amount collected. Debtor contact information (phone number, email, etc) and information about the debt (amount, original due date, any interest owed, etc) are shared with the debt collector but there’s no transfer of ownership. In this arrangement, the original creditor (the businesses owed the funds) isn’t on the hook for a cent unless the agency is successful. They maintain all rights to the client relationship outright and (bonus) because the agency’s compensation is tied to a percentage, they’re always incentivized to recover the full amount owed (instead of settling for pennies on the dollar).
#2: An invoice should only be sent to collections when it is 12 months (or more) past due. Truly, a business is within its rights to send an invoice to collections on the first day that it becomes past due. That being said, the “Day 1” method is not generally recommended. It is recommended that businesses educate themselves on the correlation between the age of debt, and the amount they’ll have to part with to have an agency collect it. In general – the older a debt, the harder it’s considered to collect. The percentage a collection agency will ask for gradually increases as the debt ages – with a huge spike at or around 12 months (meaning the sooner the better, whenever possible). While the best time to escalate a debt will vary between companies, the most successful businesses make collections a strategic component of their revenue management and account receivable workflow. In general, the best practice is to try and collect “in house” (via phone calls and email) until the debt becomes 60 to 90 days overdue (which also keeps you compliant with the Dunning process). At that time, if the debt/invoice is still outstanding, enlist the help of a collection agency you trust, and let them handle it from there.
#3: It’s better to write off unpaid invoices than to send a delinquent account to collections. It is always in a business’s best interest to try and collect on what they’re owed. Period. If an account has outstanding debts that have aged to or past 60-90 days, your next step should be to have a collection agency try to recover it. Why not just write it off? There are actually a few reasons. First, Dunning compliance must be proven before a debt is considered “bad” and can be used as a write-off. Sending it to a reputable collections agency first checks all the proverbial “boxes” you’d need to show proof of in the event of an audit. Second, most businesses already have plenty of deductions (which is all a write off is), and will subsequently get more value out of collecting something on the debt rather than nothing. Third (saving the best for last), working with an agency and writing off customer debt are not mutually exclusive. If an agency makes an unsuccessful attempt at collecting a debt, it can (and should) still be used as a write off on the business’s tax return.
#4: I will hurt my client’s credit if I send them to collections. Many businesses are hesitant to engage a collection agency for fear of damaging their client’s credit. It might be fear of losing the client relationship, backlash hurting their public reputation, or it may be that they just don’t feel like it’s good karma. While the idea behind this myth is honorable, placing an account in collections and reporting the delinquency to the credit bureaus (like Equifax, Experian, TransUnion) are two separate actions. The latter would impact someone’s consumer credit report, which could make it harder for them to qualify for a credit card, a mortgage, or personal loans in the future. It’s always an option but one that’s only put into motion if the business owner hiring the agency, chooses to take that additional step. Businesses who want to get paid but don’t want to ding their clients’ credit scores, can still feel good about working with a reputable debt collection agency, knowing that they’re in control of reporting activity to the credit bureau. Of course, in instances where a business does want to report the delinquency that’s also their prerogative. Whether or not the credit bureaus will be informed can even be leveraged in the collections process as a way to get unresponsive clients to engage.
#5: All collection agencies are dishonest and working with one will make my business look bad. This is perhaps the biggest misconception of all. While there are certainly agencies with dishonorable intentions out there, there are many who are trustworthy, honest and practice the highest level of courtesy in compliance with the Fair Debt Collection Practices Act. It’s distinguishing the good from the bad that can be tricky. Helping business owners feel confident that they’re working with an agency they can trust is a huge part of why CollBox exists. We only partner with collection agencies that have a proven track record of success, no known history of misconduct and have passed our rigorous vetting process. In other words, to join the CollBox Collections Network, an agency has to be the type of business we’d feel confident referring the most important people in our lives to (our family, friends and of course – our customers)! Interested in learning more about how our platform and process could help your business collect on outstanding debts you’d rather not write off? Create your free CollBox account to get started!
Looking for more bookkeeping information or tips? Check out our post on Signs of Payroll Fraud