Collection Techniques

The longer an account goes unpaid, the more difficult it becomes to collect. One of the biggest problems with any business and their collection department is that in many small businesses, there is no collection department. They are relying on the accounts receivable clerk to also act as the collector and s/he is already busy getting invoices out and keeping up with customer payments.

Most businesses just rely on the accounts being paid, unfortunately this is not always the case.
Accounts should not be uncollected for more than 90 days. By 120 days very serious measures should have been taken. After the original billing goes out, a notice should be sent once the due date has past. Notices should be sent out at 30/60/90 days. During this time, phone calls should be attempted to reach the party. If no arrangements are made and there has been no response, then there are a few options to take:

1. Send out a Pre-collect notice with options
2. Turn it over to a debt collection agency
3. Take it to court yourself

Collection Agencies:

There is a place for debt collection agencies. You do not have time to mess with an account that isn't paying. As we said before, take action no later than 120 days out.

Generally, a collection agency does nothing but collect past due accounts for businesses. They are considered by law third party collectors. When you are attempting to collect your own accounts, but have yet to turn them over, you are considered a first party collector. Depending on your state, you may have certain laws to follow. If you or the collection agency break the law in the collection of a debt, the debtor may sue. Make sure you understand the laws of your state when you begin to collect your accounts. Your attorney should be able to research this for you.

When you turn the account over to collections, you have "sold" the account to them. We do not recommend you pay any fees up front, but rather choose an agency who will collect on a contingency basis. If they do manage to collect an account, they receive up to 50% of the money. So, if someone owes you $500 and it is collected by the agency, you would receive a check for $250. The account would then be considered paid in full. An agency may decide to sue the debtor and all costs for this would be covered by the agency.

Sometimes the agency will garnish a debtor's pay check until the debt is paid in full. Most agencies worth their salt have a representative that works directly with you to explain their procedures. Do not use a collection agency from out of state. Stick to the locals.

Take it to court yourself:

You should understand what is expected when you use the legal system. You may hire your own attorney or go to court by yourself, depending on the amount of the debt. ALWAYS be completely prepared before you walk into court. Be professional. Do not become angry with the debtor. You would be surprised at what some businesses have done to the debtor because they were upset. It is time consuming, so unless you or one of your staff is trained in this area, you may want to use a collection agency instead. But, with some proper training and organization, you will be able to manage quite nicely on your own (as always, consider the time involved and the trade-off for more productive activities, such as generating new business, that you could be pursuing.)

Much of the nastiness of collection can be removed by having a clear policy and procedure set in your credit department. Take the time to do that and you should easily have 98% of your clients paying on time. If you don't set clear policy, you'll soon regret it. The person who is "selling" the product, should NOT be the person "collecting" the debt. It's too much of a conflict.
If you are a small business and all else fails after the first 120 days then you may consider using a collection agency.