When should my business stop chasing unpaid invoices and hire a debt collection agency?

Debt collection and debt recovery - also called loan collection and loan recovery - sound very similar, but they aren’t. Collection involves keeping things in house and using your own resources, and recovery means a third party is doing it.

Chances are you’ve dealt with both at some point. A client pays you late, you put some effort into collecting on that account with no success, and finally you hire a commercial recovery agency. But how do you know when it’s time to pass a matter over from collection to recovery?

Whether you call it collection or recovery, the goal is the same: get back all the money you’re owed on that account.

Reputable agencies tend to have high success rates. It’s all they do.

Unpaid Debts

Often, bigger companies have a team in charge of chasing unpaid debts. This team usually gets involved once an invoice has been unpaid for thirty days or so.

Unpaid invoices are irritating, true. But it’s the cash flow that hurts. They may also affect your reputation. The longer an invoice stays unpaid, the harder it may be to collect.

Before you pick up the phone to chase the client for payment, make sure your invoice was actually received by the person responsible for payment, and rule out any dispute over the services or product provided. Once that’s ruled out, here’s how to proceed.

There are many reasons customers don’t pay their invoices. A few common ones:

• It didn’t meet their payment requirements.
• The goods or services they received weren’t what they expected.
• The payment system used at their business doesn’t properly receive invoice payments.
• They don’t have enough cash to pay the invoice up front. They may need an installment plan.

Your first step should be a phone call. Once you actually talk to the client your chances of being paid or reaching an agreement become much higher.

When the conversation isn’t enough, follow up with a collection letter. Keep it brief. Remind them what they owe and ask for prompt payment.

If the calls and the letter go unanswered, you’ve done what you can to get paid and it’s time to take further action. Hiring a collection agency can help you recover the funds.

The 60-day Overdue Mark

Commercial recovery companies typically take on a client’s account at the 60-day overdue mark. Credit, at least in the U.S., is a powerful thing. The debtor’s credit will be affected once recovery begins. It also helps the debt recovery agency, because now the debtor is more likely to respond. Recovery applies to credit cards, medical bills, loans, even utility and cellphone bills.

A lot of collection agencies also specialize. One outfit may only take debts above a certain amount that are a certain period past due, for example. Reputable ones will only pursue debts within the statute of limitations. As long as a debt is still inside the statute of limitations, it isn’t too old to be legally pursued. That statute, though, is different from state to state, so look yours up.

Turning a Debt over to a Recovery Agency

You might have some more questions about turning a debt over to a recovery agency. Here are answers to three of the most common.

There are several benefits to using a collection agency.

• Legal. Doing it yourself carries risk. They are aware of the Fair Debt Collection Practices Act and federal and state rules, which lowers the risk of collecting on your own. They know what to do and what to avoid.
• Documentation. They keep records of the whole process, which helps if you decide to sue the debtor or write off bad debt with the IRS.
• Greater chance of getting paid. Concentrate on running your business and let the pros go after the debt. You’ll have a better shot of being paid.
• Faster payment. If the agency is after the debt, the debtor’s credit is at stake. They’ll be more likely to pay.

Recovery firms charge either a fixed or a contingency fee. The amount you pay depends on the agency, how long the debt has been unpaid, what type of debt it is and the balance. Old debts are harder to collect, so they can cost more. If you wait too long to turn the invoice over, you may pay more in agency fees than if you had passed it along sooner.

Thoroughly vet a collection agency before doing business with it to avoid a costly headache down the line.

• Do your homework. Talk to past clients, ask for referrals and read reviews. Ask them about the clients and debts they usually recover, and if they can handle it, too.
• License. Steer clear of any agency without a license. Every recovery outfit is required to carry one.
• Cost. Think about getting the full amount back on your debts versus cost. A cheap service may get less back and a higher-priced one may work harder to get it all back. Consider success rates, too.
• Errors and Omissions Insurance. Ask about it because if the agency works in bad faith, and the debtor sues you both, you will want to be covered.