Bad debts affect small businesses more than large businesses. Large businesses have the buffer to survive bad debts while small businesses do not. If small businesses do not get payments on time, they cannot reinvest in the business for lack of funds and have to stop operations. Many businesses have actually shut down because of their inability to recover bad debts.Why is it difficult for small businesses to collect bad debts?Some of the factors that make collecting debt especially difficult are described below:Avoiding unpleasantness: Collecting debt is an unpleasant task. As the business is small, its focus is on getting more business and retaining existing customers. Despite the fact that customers are in the wrong in delaying payments, the business will not remind them of the dues too often for fear of losing further business. Customers understand the predicament of small businesses and take advantage of it.Short of resources: Small businesses do not have the resources to recover bad debts. Collecting debt requires keeping accurate records of debt and credit transactions, sending out reminder letters regularly, calling up customers, visiting customers and regular follow up. This needs time, manpower and money. Small businesses are short of all three.Using in-house staff to collect debt: Small businesses try to save money by recovering bad debts themselves. The business gives the responsibility of debt collection to an Accounts Receivables person. This is not very effective and rarely results in quick debt recovery.Firstly, the Accounts personnel are already swamped with work, and cannot put in the required time and effort to collect debt. Secondly, debt collection is a delicate task that needs to be handled with finesse. Accounts personnel can in fact spoil your customer relationships by being tactless. Thirdly, in-house personnel may not be aware of the state and federal laws regulating debt collection. Violation of these laws will cost your business more by landing you in legal trouble.How does a collection agency help small businesses?Collection agencies can help small businesses improve their bottom line considerably. Many collection agencies deal with small business accounts, and charge accordingly. The fact that you have partnered with a collection agency will make customers take you more seriously.Collection agencies have skilled staff trained in debt collection strategies. They are well-versed in debt collection laws and have a professional and cordial approach towards customers. The collection agencies will charge a fixed rate or a percentage of the debt they collect. They have greater incentive to recover debt faster.Collection agencies collect debts through a four-phase process. The process involves sending out demand letters to the customer, contacting customer through phone, reporting customer to a credit rating bureau and filing a lawsuit in case of non-payment.The demand letters or notices sent out by the collection agency give details of the debt, the amount due and a payment due date. The third and last demand letter warns the customer of being reported to a credit rating bureau if the payment is not settled by the specified due date. The warning will push most customers into settling their dues as a report to credit rating bureaus will hurt their creditworthiness.Collection agencies fall cheaper in the longer run, as they recover the bad debts you would otherwise write off. Collection agencies will recover your debts in a professional manner, thereby enhancing your customer relationships. With a collection agency as your partner, you can focus on your business operations without worrying about funds.
Collecting debt is a long and arduous process. In August 2009, Wall Street Journal reported that companies with less than $500 million in sales were taking 58.9 days to collect money owed to them, up from 54.4 days in 2008. Larger businesses fared much better at 41 days, down from 41.9 days in 2008. Though this increase is alarming, it could have been much worse considering the present economic slowdown.Pressure on small businessesIf you are a small business, it is double whammy for you. You sales have probably dropped in this economy and you are having a hard time collecting payments for the sales you make. On top of that, your buyers know that business is not good so they are probably demanding better deals, promotions or lower prices to continue to buy from you. To add to your difficulties even the credit has dried up and it is tough to get any loans. Without resources to buy raw material or pay your bills, your small business runs the risk of shut down or bankruptcy.Protecting customer relationshipsDelinquent customers hurt every business, big or small. Recovering debt from non-paying or slow-paying customers is an arduous and delicate task. Good customer relationships are vital to business growth. Businesses avoid risking their customer relations by following up on payments too aggressively.Hire a collection agency to cut lossesIt is less expensive to retain existing customers than acquire new ones. Incentives such as lower prices, credit, promotions and new schemes help in retaining existing customers when the market is very competitive. However, companies also need to cut their losses by reducing delay in payments.Collection agencies collect debt for companies. Hiring a collection agency has many advantages:
The business enjoys good customer relationships as the collection of debt is handled by an external agency.
As the collection of debt is outsourced, the company can solely concentrate on business growth.
Collection agencies are cost-effective as they are only paid a percentage of the debt they recover.
The earlier a collection agency is employed to collect debt, the larger and faster will be the collection. In the longer run, collection agencies are more effective in collecting debt than in-house company representatives.
Sell debt to debt purchasersDebt purchasing agencies are an option when the business is in urgent need of funds. On selling the debt to the debt purchaser, businesses receive payment immediately and pass on the job of collecting debt to the purchasing agency. However, the rate at which the debt is purchased is quite low. Debt purchasers make a profit by recovering more money from the debtor than the amount they have paid for it.Businesses have the option of hiring a collection agency or selling the debt to recover payments. Debt purchasers are selected when funds are required immediately. Either way, companies can continue doing business with the customers without ruining their relationship.