Small Businesses Should Partner with a Collection Agency-Part 1
Collection agencies have long been integral to the success of the small business owner. Small businesses face special challenges in recovering outstanding debt. Unlike large businesses such as hospitals and credit card companies, the average small business owner does not have the time or resources to devote to chasing bad debt, nor does he have the financial security to easily write-off bad debt as one of the costs of doing business. For these companies, recouping past due balances can be the difference between financial success and complete failure. A good collection agency can prevent the small business owner from facing bankruptcy, lay-offs and closure.
However, most small businesses are overlooked by collection agencies, when a relationship between the two would be mutually beneficial. According to a 2006 study conducted by The Association of Credit and Collection Professionals (ACA International), nearly 56% of all collection accounts placed in 2006 were hospital accounts and delinquent credit card debts. Only 10% of all accounts placed during that period were non-hospital healthcare accounts (doctors and dentists in private practice), only 1.2% of accounts placed were commercial, or business to business debts, and only 1.5% of all accounts were “other” types of retail accounts. In other words, in a world overpopulated with small businesses, these companies are not benefiting from a relationship with collection agencies.
Small business owners often shudder at the idea of spending money to collect the money that is already owed to them. What many small business owners do not understand is that after time, they are less likely to collect the full amount owed to them, no matter how much time and energy they are spending on any given account. The United States Department of Commerce estimates that businesses are most successful in recouping monies owed to them during the first 60 days after the debt is incurred. At ninety days, businesses can expect to collect up to 74 cents on the dollar. After six months the figure drops to 58 cents on the dollar, and after a year to 27 cents on the dollar. How much time and effort would you put into an account that would only yield you 27 cents on the dollar?
Corporate America and large collection agencies have been working together for quite some time. Credit card debt alone constituted nearly 24% of all new collection agency business last year (ACA, 2006). Small businesses seem to be ignored by hungry collection agencies, and those collection agencies that do manage to reach out to the small business owner are often turned down due to the misconceptions that it will cost the business owner too much money to hire an outside agency. Despite these misconceptions and the lack of collection tactics geared toward the small businesses, a relationship between the two would not only be mutually beneficial, but surprisingly profitable as well.
According to the ACA, the average recovery rate for commercial debts was 27.6% in 2006. The average recovery rates for non-hospital healthcare debts and for the catch-all “other” category of small businesses were 19.3% and 16.1% respectively. This amounts to average payments of $387.00 for commercial accounts, $111.00 for non-hospital healthcare accounts, and $189.00 for “other” small business accounts. An agency that deals solely with accounts of this type can assume it will do relatively well. Likewise, small business owners can spend their valuable time on more important tasks, and feel confident that collection efforts will be successful on their types of accounts.
In the next article, look for what small businesses should expect from their relationship with a collection agency.
About the Author: April Magnuson is the Collection Manager for NeF Capital, LLC. NeF Capital handles consumer collections in Maine, Vermont, New Hampshire, Connecticut and Rhode Island.
March 25th, 2008 at 1:33 pm
It’s a little bit strange that owners of small businesses devote as much time as they do to debt collection, when they should be trying to run their business. The idea of using the services of a debt collection agency is probably one that does not appeal to proprietors, but it makes sense - as the author states, the chances of collecting a delinquent debt diminish over time. So why not use an agency, as anything you can get back is better than nothing, and the chances are that you will be able to negotiate with the agency so that they only get paid if you do.
April 13th, 2008 at 5:51 pm
Chris, I completely agree that businesses should stick to dealing with their good paying customers and pass along the challenging delinquent customers to a collection agency. And yes, do it timely, becasue the longer one waits teh harder it is to collect.