Businesses cannot help incur bad debts in the process of acquiring customers by extending credit. Some customers take advantage of this service by delaying payments or even disclaiming the debts.
Bad debts tend to accumulate unless dealt with immediately. The delay in recovering payment is usually because of the creditor’s unwillingness to play ‘bad cop’ with customers. The desire to maintain good relationships with customers makes businesses lenient in collecting debt. The longer a debt goes unpaid, the lesser are its chances of making good.
Businesses can opt to collect the bad debts themselves or outsource the job to a collection agency. Some of the debt collection techniques are discussed below:
In-house staff for collecting debt
The business may allot the task of collection to the Accounts Receivable department of the company. The department is responsible for sending demand letters to customers, making calls and following up on the debt.
The Accounts Receivables department is bogged down with its own work and may not give debt collection due priority. Besides, the department is not really skilled in debt collection strategies or debt collection laws. Unprofessional handling of debt collection may cost the business their customer, or worse, land them in legal trouble.
Hiring a collection agency
Collection Agencies are proficient in the art of collecting debt. They have trained professionals who work in accordance with the Fair Debt Collection Practices Act (FDCP Act) ensuring the customers are treated courteously.
The first task of a collection agency is to send out a notice to the customer. The notice is similar to a demand letter, except that customer takes it more seriously. The fact that the creditor has taken the help of a third party agency to recover the debt is enough to get many customers to pay up. The fear of losing their credit rating also spurs customers into settling their dues.
The demand letter states the name collection agency is acting, debt details, total amount owed and a payment due date. The collection agency accompanies the demand letter with a call explaining the demand letter and advising the customer to settle the payment by the date specified.
Some of the strategies employed by collection agencies are:
Calling customers: Collection agencies call customers to follow up on payments. The calls are cordial and the intention of the collection agency is to build a good rapport with the customer. The attitude of the collection agency plays an important role in winning the customer’s cooperation in settling the debt.
Skip tracing: Collection agencies use skip tracing to locate customers that cannot be contacted at the address, phone numbers or email ids provided to the creditor.
Forwarding: Collection agencies forward a customer account to another collection agency located in the customer’s local region, if it does not have the right to conduct business there.
Debt purchasing or Flow forwarding: Collection agencies can have a contract with a business to purchase its bad debts periodically. Creditors sell off the debts at a low market rate, to get some amount of the debt rather than losing it all. After purchasing the debt, collection agencies contact the debtor and try to recover as much of the debt as possible.
Bad debts can be minimized at an early stage if businesses have an efficient credit management policy. Clearly stating terms of repayment in the customer contract, sending regular statements, calling customers, keeping accurate records are some of the activities that can be handled by the business in-house. Businesses can then take an informed decision on whether to collect the debt themselves, hire a collection agency, or proceed with legal charges against the customer.