Every company, small, medium, or big that is in the financial sector always has ‘receivable income’ in the form of dues owed by customers. If you look at an Annual Accounts Statement there is likely to be a column denoting ‘bad debts’ or pending dues. Some of these amounts may be recovered, some not at all, or through long-winding legal procedures that can stretch through many years. The international accounting firm Pricewaterhouse Coopers (PwC) estimated that in the mid-2000s, Debt Collection Agency recovered debts to the tune of $30 billion annually. This is a whopping amount!
In such cases, companies may either deal with receivables through internal mechanisms or outsource the collection of such amounts owed, to external collection agencies. These are third-party commercial collection agencies contracted by the company to use the skills and resources that the agency has in recovering the amounts due. Such an agency is called a Debt Collection Agency. These agencies are governed by the regulations of the Fair Trade Debt Collection Practices Act and so they have the knowledge and the expertise of the dos and don’ts associated with the collection of debts.
There are many benefits accruing from using a Debt Collection Agency, among these are:
• The internal accounts department of a company is usually responsible for collecting amounts due to the company; however, ‘ageing receivables’ as long-standing debts are referred to require a lot of time, skill and dedicated effort which may require intensive training. Since delays can cost the company extensively, a third-party service or commercial collection agency is fine-tuned to handle this job exclusively and therefore able to recover money that might otherwise end up not being recovered at all.
• Sales teams in companies that are owed amounts by clients are sometimes not paid their commissions or incentives if monies are outstanding from customers. This forces salespeople to spend a great deal of time working to recover the money rather than doing actual sales calls or sales generation for future revenues. This greatly impacts the revenues of a business.
• Acquiring new customers is an expensive task but retaining existing customers is a key factor in the success and longevity of every business. Playing the role of ‘bad cop’ in debt recovery from existing customers is not a function that most companies look forward to as it can have adverse impacts on them. Using a third-party service to send notices for debt recovery usually spurs the person or company owning the money to get into action without seriously affecting the relationship with the company.
• In business to business circles, the unwritten policy is to prolong bill payments for as long as possible to allow better cash flows. In some cases, unless a collection agency intervenes to demand payment, checks or outstanding amounts are not released against invoices.
• By paying a collection agency or agent a fixed salary for collecting debts no matter what the amount owed, companies save a lot of money which otherwise would have been spent on paying salaries and additional time and effort in training them to collect dues effectively. Most companies only pay collection agencies when the money is recovered.