Dean Kaplan is President of The Kaplan Group . He writes about business debt collection, contract negotiations and provides financial advice.
As a professional debt collector, I've heard a lot of myths about my profession. I specialize in commercial, or B2B, collections. We deal with fewer myths, but I still encounter misconceptions. Here are the nine I hear the most.
1. Debt collectors will insult my clients.
The idea that debt collectors are rude or aggressive is the primary misconception those of us in the industry face. Just like in any field, there are some bad apples. However, debt collectors have been trained in negotiation skills, so they know how to avoid insulting debtors. Also, because they don't have the same emotional investment in your company that you and your staff do, they may be less likely to react in anger.
2. Debt collection should be a last resort.
I'm not suggesting you send every client who is two days late to collections. However, the longer you wait, the less likely you are to recover any money. According to the Commercial Collection Agencies of America , on average, nearly 70% of receivables that are 3 months past due are collected. At a year past due, that number goes down to 21.4%.
3. I should try to negotiate with my client before going to debt collection.
Offering a small discount or a limited extended time to a valued client is fine. But I generally advise against trying to negotiate on your own. Once you've let a client know you'll accept 40% of the invoice if they pay by X date, it's hard to walk that offer back. So, if the client still doesn't pay and you send them to collections, you've started your collection agent off at a disadvantage.
4. I should sue instead of bothering with debt collection.
I view going to court as an absolute last resort. Suing while paying an attorney hourly is expensive and time-consuming, even if you win. There's also no guarantee you'll be able to recoup the money. If your client closes or goes into bankruptcy, you are not likely to collect on a judgment.
You should never threaten to sue a client. If you make the threat and do not follow through, the client loses some of their incentive to pay you. Finally, many collection agencies have attorneys who will sue on a contingency basis, which typically is better than paying an attorney hourly.
5. I don't have to worry about debt collection until an invoice is late.
Debt collection actually starts before the first contract is signed. An experienced debt collector can advise you on how to write credit applications, contracts and invoices in a way that makes collection easier and more profitable. Just like a lawyer or an accountant, a debt collector can be a valuable member of your business team.
6. It would be better to take a tax write-off than go to collections.
Writing off debt may be good for accounting purposes, but it doesn't return cash to your business. Collecting can help your cash flow and help you get back customers.
7. Debt collectors just do what I would do.
Unless your accounts receivable department is designed for debt recovery, a debt collector has resources you do not. From software that helps with clients who are avoiding your calls, to skip tracing and investigative tools, debt collectors are set up to do the job. If your client is ignoring you, sending a debt to a collection agency shows a new level of seriousness.
8. Debt collection is expensive.
Debt collection does come at a cost, but it can actually save you money if it results in you getting the money you're owed. Most reputable B2B collectors work on a contingency basis, meaning they only get paid if they can recover the money. What's more, if your staff is busy trying to collect on old invoices, they aren't doing other things that could be making you money.
9. Debt collection is my only option.
Businesses can assume their own responsibility for collections, but in doing so, must realize the risk involved. After all, they are putting their business on the line.
A collector must have more than diligence and good negotiation skills. A collector must also have patience for debtors who may "go on the offensive" when contacted by an accounts receivable (AR) team. Your AR staff must always remain calm and professional but firm. They must set specific deadlines for payments or, at the least, for further contact. If deadlines are missed, they must contact the debtor immediately and place any orders on hold.
However, by not collecting on unpaid invoices, the business hurts its own cash flow. And, while it may not show on a credit report that you're owed money, it can impact the amount you can borrow from the bank and your credit limit. A higher usage of available credit negatively impacts a business's credit rating. If you're not going to hire a debt collector, don't let other people's business problems become your problems.
Like all specialized businesses, it's hard for a layperson to know the ins and outs of debt collectors. A reputable, trusted collector can help you understand the details.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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