Any company, small, medium or large that is in the financial sector always has ‘income receivable’ in the form of customer debts. If you look at an annual statement, there is likely to be a column that says ‘bad debts’ or pending due. Some of these amounts can be recovered, others never, or through lengthy legal proceedings that can drag on for many years. The international accounting firm Pricewaterhouse Coopers (PwC) estimated that in the mid-2000s, external collection agencies recovered debts to the tune of $30 billion annually. This is a huge amount!
In such cases, companies may treat accounts receivable through internal mechanisms or subcontract the collection of such amounts owed to external collection agencies. These are third-party commercial collection agencies hired by the company to use the skills and resources the agency has to recover amounts owed. Such an agency is called a Debt Collection Agency. These agencies abide by the regulations of the Fair Trade Debt Collection Practices Act and therefore have the knowledge and experience of the do’s and don’ts of debt collection.
There are many benefits to using a debt collection agency, including:
• A company’s internal accounting department is often responsible for collecting amounts owed to the company; however, ‘old accounts receivable’ as long-term debt requires a lot of time, skill and dedicated effort, which may require intensive training. Since delays can cost the company dearly, a third-party service or commercial collection agency is tuned to handle this work exclusively, and therefore can recover money that might not otherwise be recovered at all.
• Sales teams at companies that are owed amounts by customers sometimes don’t get paid their commissions or incentives if money is outstanding from customers. This forces sales people to spend a significant amount of time working to make money back instead of making actual sales calls or generating sales for future revenue. This has a huge impact on a company’s revenue.
• Acquiring new customers is an expensive endeavor, but retaining existing customers is a key factor in the success and longevity of every business. Playing the ‘bad cop’ role in debt recovery for existing customers is not a role most companies expect, as it can have adverse impacts on them. Using a third-party service to send debt collection notices generally encourages the person or business that owes the money to take action without seriously affecting the relationship with the business.
• In business-to-business circles, the unwritten policy is to drag out invoice payments as long as possible to allow for better cash flows. In some pending cases, unless a collection agency steps in to enforce payment, checks or amounts are not released against invoices.
• By paying a collection agency or agent a fixed salary to collect debts regardless of the amount owed, businesses save a lot of money that would otherwise have been spent on paying salaries and additional time and effort training them to collect effectively. Most companies only pay collection agencies when the money is recovered.
Especially for companies in the financial sector, such as banks, granting lines of credit to existing and new customers is highly dependent on keeping “old receivables” to a minimum. Only by driving growth can banks succeed in achieving their target deposits and revenue. Therefore, by using a commercial collection agency, the bank can expect to recover amounts early, maintain customer relationships and creditworthiness, and ensure that its financial books remain healthy.