Debt collection, whether commercial or consumer, is one vital part of a comprehensive credit risk management system. When we hear the words “credit risk management,” we may have a general idea of the meaning, but for the record, a comprehensive credit risk management system will use a wide range of “before and after” credit risk products, services, systems, and solutions that will fulfill three objectives for a company:
- To safeguard its assets – cash, accounts receivables, and inventory.
- To support its sales and marketing goals.
- To strengthen the internal risk management system.
In view of these goals, I would like to take a moment to explain what to look for when choosing a debt collection agency as one vital part of strengthening your company’s credit risk management system.
First, I am a believer that if you do not have an internal collection department that can efficiently handle your slow paying and outstanding accounts—and most accountants and CPAs probably don’t. If that's the case, then by all means outsourcing the collection function to a qualified collection agent or attorney as soon as possible would be a very prudent business decision.
Before even trying to understand if a collection agency is a good fit, we must step back and understand if your collection needs come under commercial, consumer, or both within your business. While these examples may not apply to you, they may apply to your clients.
If your collection needs are for hundreds of medical cases against individuals, your needs will best be fulfilled by using a call center type agency that specializes in handling these types of cases. Conversely, if your collection needs are commercial cases for mining equipment with balances in the hundreds of thousands of dollars, you would benefit by using a collection agency or attorney that specializes in the collection of commercial claims in this field. I know this seems obvious, but I have found that many companies pick their collection support based on not what they need, but who they know.
1. How do you know that the agency you are dealing with is a legally and professionally legitimate company?
This idea is no different than trying to understand the creditworthiness of your customers. Since you need to obtain proof that the agency is licensed and bonded in the states where they are providing their collection services, don’t be bashful about asking the agency to send you a copy of it’s license and certificate of insurance for Errors & Omissions. You certainly don’t want to be held responsible should a legal problem arise in the course of the agency’s efforts to collect a debt on your behalf. In addition, inquire as to whether the agency has been involved in any lawsuits or paid any fines due to some wrongful collection activities.
Furthermore, inquire as to their membership in the Association of Credit and Collection Professionals, the Commercial Law League of America, or other professional associations. This would be an important point of evaluation as their membership would indicate a basic adherence to professional standards. You should note that the collection of consumer debt is specifically addressed by the Fair Debt Collection Practices Act. This Act was adopted to eliminate abusive debt collection practices by debt collectors, to ensure that debt collectors who do not use abusive practices are not competitively disadvantaged, and to promote consistent state action and legislation in this area.
The Federal Trade Commission has primary responsibility for enforcing the Act. This Act applies to persons, including attorneys, who use any means of interstate commerce or the mails in any business having debt collection as its principal purpose, or persons who regularly collect or attempt to collect debts that are owed to another. The law also applies to any creditor who, while collecting his or her own debt, uses a name that suggests that a third party is trying to collect the debt.
2. Is the agency or attorney providing their collection services to other companies in your field, and is it possible to let you call one or two of their other customers to get their impression?
Talking with other companies, especially those in the same industry, will give you one of the best assurances for the performance and reliability of this agency or attorney.
3. What are your present internal collection policies and procedures, and do you normally outsource to an agency when an account becomes delinquent?
Understanding at what point you need to place an account with an agency will result in how well the agency can perform on your behalf. For example, let’s say that you have one collector at your company who is trying to collect on a couple of hundred cases per month. If under your present system your collector cannot manage the accounts efficiently, then it's best to sit down with your agency, segment the pool of accounts to be placed, and then place them with the agency on a timely basis that will allow the agency to support you to the fullest. Too often, companies wait months before they outsource an account. A rule of thumb is that an account that is already six months delinquent only has a 50% chance of being collected and at one year only a 20% chance. Every company has to decide at what it point it will be more cost effective to place the account with an agency rather than attempt to collect it in-house.
4. Are you selling a complicated service that requires time to deliver?
The more complicated the product that you are selling, the higher the skill the collector needs to have in dealing with the collection issues. A collector friend of mine was recently asked to resolve an outstanding debt on a “modified atmospheric meat packing machine” in which the debt of $90,000 was being disputed. In order to handle the claim, effectively the collector had to go to the creditor’s location and learn about the operation of the machine to a level where he could understand the dispute. If the collectors at the agency you choose have neither the capability nor interest to understand your business, best to take a pass on choosing them.
5. What are the overall collection capabilities of the agency?
This entails confirming the total number of collectors, the type of training they would receive to handle your accounts, the number of accounts handled per collector per month, and the average overall collection rate. If you have a client who is planning to outsource 5,000 retail accounts per month under $1,000 each and the agency only has three people, there is no way that they could handle your accounts effectively. Generally speaking, a good collector working in sync with a sophisticated computer system could probably handle between 500-800 retail cases per month.
6. What are the reporting capabilities of the agency?
This comprises the ability of the agency to give you an update of any account at any time that you have passed to it for collection. These days, many agencies have developed collection systems that allow clients to access the system through the internet by password. The collection system should allow you to see the status of each account, confirm how much has been collected to date, show the past payment remittances to your company, and allow you to understand every aspect of the service of your accounts, from placement through collection.
7. What is the agency’s commission structure?
Almost all agencies and collection attorneys work on a success basis and generally the rate is between 15%-25%. However, the more cases that are placed with an agency on a regularly basis, the cheaper the rate becomes. The question is to what extent does the agency or attorney become integrated as a part of your internal collection system. If your company places claims at a very early stage in which the cases are called under your company’s name (normally a soft call service), the rate can be as low as 2% of the claim value up to $100.00. In addition to the rate, if the agency can print up and send out past-due notices under your company’s name, the agency is indeed becoming your collection outsourcing partner.
8. Finally, what is the agency’s ability to communicate with you?
Every agency should have one person at the company who will respond to your inquiries and requests on a regular basis with another person able to back them up. Many agencies these days don’t even know their customers and there can often be a very impersonal feeling when one calls to the agency.
The above tips should give you a basic outline of what to look for when choosing a collection agency, which is again one vital part of maintaining a strong credit risk management system. Although it’s necessary to do a certain level of due diligence, in the end I believe it will also take at least a 6-month trial period to understand if there is a good fit between your firm, your clients’ companies and the agency.