Customary Business Practices for Turning a Debt over to a Collection Agency

When you offer credit to a customer, the last thing you want is to eventually turn that customer over to a collection agency.

Unfortunately, collections are an inevitable part of the commercial credit game, and some of your accounts are going to reach this endpoint from time to time. Working with a good collection agency (like ourselves at FMCA), will allow you to pursue at least some payment on this bad debt, which is better than writing off the whole thing.

And before we do and as an aside, we wanted to tell you some of what FMCA as a collections agency can offer. Turning over an account to a collection agency is taking it to the next level when in-house efforts have become fruitless; therefore. The tools that collections agencies possess to enhance the pressure on the debtor are vital.

Some tools and features that set FMCA apart from most other agencies:

  •         Home furnishings industry specific (we have dealt with and know many industry dealers) 
  •         Ten Day Free Final Demand period available (There are no fees for any payments received during the 10 day free demand period)
  •         Reporting our placements to the major credit bureaus at month-end 
  •         Offer private investigator onsite visits from a national network of private investigators to a debtor location. 
  •         Over the course of 60 years, we have forged relationships with a network of attorneys throughout the United States and Canada. 
  •         Low contingency rates
  •         Online collection status
  •         We accept credit and debit card payments from debtors along with checks and check by phone/fax/email.
  •         Client remittance twice a month 

So, how should you go about turning over some of your accounts to a collection agency? Let’s look at some standard practices that will help this process run smoothly.

Establish a Firm Deadline for Bad Debts

You don’t want to be making a judgment call for each account when deciding if it should head to collections. Instead, you should have a system in place for determining when an account is too far past due and needs to be handed to a collection agency.

It is common for 90 days past due to be the deadline for when an account moves into the collections process. You are free to establish your own timeline, of course, but this is such a common approach that it makes a good starting point for your accounting process. In fact, your debtors will probably not be surprised to see the account passed to collections at 90 days, since this is such a typical approach.

Understanding the Terms

Collection agencies work in one of two ways to receive compensation for their services. One option is to work with an agency that will take a percentage of whatever money is collected from the debtor. So, if you agree to a 50% contingency with the agency, and $1,000 is collected, $500 of that money would be passed to you while the remaining $500 would belong to the agency. This is a standard arrangement and is likely what will work best for your needs.

It’s also possible to sell off old debts to a collection agency. With this approach, the agency actually buys the ownership of the debt for a small percentage of the total value. You, as the creditor, will get a small payment upfront with this plan, but there will be nothing else coming your way if money is collected on the account. With relatively little to gain in this agreement, most businesses only turn in this direction with their worst debts.

Finding the Right Approach

Yes, you want the collection agency to collect as much money as possible on these accounts. No, you don’t want them to do it at all costs. Remember, some of these debtors may simply be going through a difficult time, and they could come back as a customer at some point in the future when business is better. So, you don’t want to burn any bridges that could come back to haunt you later on.

It’s a good practice to make sure you are on the same page as the collection agency with the tone that you would like used with these accounts. Are you okay with relatively aggressive collections tactics, or do you want the agency to take a gentler approach? That’s something that you should work out ahead of time, so you don’t find out later that their methods are not in line with what you expect.

The proper use of a collection agency can be an important part of a functional accounting office. The reality of offering credit to your commercial customers is that some of those accounts are going to go bad. By effectively using collections to recover some of those losses, you can improve the performance of your credit department as a whole.

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