What traditional debt collection agencies do not want you to know!

The amount of money owed by consumers to creditors is climbing. What does that mean for you, the business owner and creditor? Every business, if it is to meet its current cash flow needs, must have ongoing and effective cash flow management.

So what are your options to recover this outstanding debt?

Conventional collection agencies charge their clients from 33-to-50% of the amount collected, which is often more than the client’s profit margin. Other traditional collection methods are equally expensive, or simply too flawed in their design to function effectively on the creditor’s behalf. Let’s take a closer look at the myths – and realities – behind common conventional collection strategies.

Conventional Collection Strategies

Historically, business people have been able to turn to six kinds of services to help them collect delinquent accounts and bad checks:

1. Traditional collection services
2. Credit bureaus
3. Lawyers
4. Percentage Collection Agencies
5. Letter Writing Agencies
6. Check Guarantee Services

Let’s look at each in more detail, and debunk the myths that surround them.

Myths about Traditional Collection Agencies and Credit Bureaus

Myth: Traditional Collection Agencies charge a fair percentage to collect outstanding debt.
Reality: No. In fact, you should be prepared to pay between 33% and 50% of the amount collected by any credit bureau or traditional Collection Service you hire.

Myth:
 Hiring a traditional collection service or credit bureau to collect your outstanding debt will result in a much higher collection rate than any other method.
Reality: Their recovery ratio is shockingly low, only about 17%, leaving the creditor with net cash of less than 10 cents on the dollar.

Myths about Percentage Collection Agencies

Myth: Traditional percentage agencies will work each account diligently.
Reality: The percentage fee structure used by agencies, credit bureaus and attorneys leads to “skimming” of accounts. In other words, since the agency is paid out of what it collects on an account, they typically concentrate their efforts on those easier, larger, newer, local accounts, and limits efforts on the smaller, older and out-of-town accounts. This results in even lower recovery ratios.

Myth:
 As the business owner and creditor, I am in control of all my outstanding accounts.
Reality: Not so. Once a creditor turns over an account to a conventional agency, all further contact is between the debtor and the agency. The creditor is out of the picture entirely. If the agency ever manages to collect, the creditor still must endure a “clearing period” before getting paid.

Myth:
 Traditional agencies will treat my debtors with respect, so we can maintain a business relationship in the future.
Reality: When a business assigns an account to a conventional agency, it will most likely never do business with that debtor again. The reason: creditors often delay turning accounts over to a third party hoping to avoid paying collection fees. By then, accounts have seriously deteriorated and the agency employs harsh collection tactics, which often alienate the debtor, and usually precludes any chance of sustaining the customer relationship.

Myth: If your bad debt is not more than a year old, it should be easy to collect.
Reality: The longer you wait, the less you are likely to collect.

Myths about Lawyers

Myth: Lawyers are effective because they can threaten litigation.
Reality: Most lawyers are not collection attorneys, and are not equipped to handle collections. Some lawyers do specialize in debt collection however, they:

o can’t affect credit records.
o don’t have people in the field.
o won’t work small accounts.
o skim accounts profusely.

The outcome: The customer receives less than half an effort. Attorneys doing collection work are either doing a client a favor, or charging such a high percentage that they consume the creditor’s profit margin. Cash flow and the ultimate recovery ratio are reduced.

Myths about Letter Writing Services

Myth: Letter writing services are a good option because of their low cost.
Reality: Letter writing services (sometimes known as “flat raters”) sell their clients a series of reminder letters sent to debtors. Although low in cost (averaging $7 to $10 per account), the Fair Debt Collection Practices Act requires them to disclose to the debtor in the letter that the reminder service:

o can’t affect credit records.
o aren’t a collection agency.
o have no authority to collect the debt
o Won’t take any action, legal or otherwise, regarding the claim.

Consequently, they are ineffective. Even worse, hard core debts (the ones the creditor is most interested in collecting) simply deteriorate further as they age during the 2-to-3 month letter writing cycle.

Myths about Check Guarantee Services

Myth: Using a Check Guarantee Services is a good option.
Reality: Some retailers use check guarantee or check insurance services to protect themselves from bad check losses. These services generally charge from 3-4% of the gross amounts of the checks, but only about 2% of the checks are bad and are replaced by the Check Guarantee Service (called the “loss recovery”).

The problem with these check insurance services is that they are quick to reject checks that are not properly submitted (e.g., the check writer does not have two forms of identification). Only two of every 100 checks ever bounce after being re-deposited. The creditor pays the premium anyway.

Now, let’s take a look at a better way to collect outstanding debt:

The ideal way to collect debt is to utilize a Cash Recovery methodology. The system would have you the merchant spending time collecting the 15-60 day late (this is the time they are most collectable, and then shifting the accounts to a professional service that charges a small fee per account ($9-$60 per based on average balances would be fair.) This service would have all the money remitted directly to the merchant and provide complete accountability on each step of the process. Anything short of this would not be beneficial in the long run. Once this system has a 120 days to mature you will see less and less accounts getting to the 60+ day late mark!

Looking for an easy way to collect debt? Sign up for  Dunnly and be  cash flow positive!

 

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