It's easy to extend too much credit when you're trying to entice companies into doing more business with you. But beware: extending too much credit can lead to unpaid accounts, which can quickly and severely limit the cash you have to grow your business. If you don't stay on top of overdue accounts, your chances of collecting the money decreases over time.
According to a survey by the Commercial Collection Agency Section of the Commercial Law League of America, the probability of collecting an overdue account drops to 73 percent after just three months, to 57 percent after six months, and to only 29 percent after one year.
One way to recover more from your delinquent accounts is to hire a collection agency, which locates debtors and collects the money you're owed. If brought on board early, a collection agency can often recover a substantial portion of your unpaid accounts.
In addition to increasing your chances of actually getting paid, using an agency saves you time and money — two of your most valuable resources. With their custom-designed phone systems, computers, and software, collection agencies can be more effective than you can in recovering delinquent accounts. Although collection agencies charge between 15 to 50 percent of what they recover, you still end up with more than you probably could have, had you tried to collect on your own.
When selecting an agency, you should:
- Find out if the collection agency is a member of the the Association of Credit and Collection Professionals or the Commercial Law League of America, which both require that their members adhere to a code of ethics, and are familiar with The Fair Debt Collection Practices Act.
- Make sure the agency has insurance that will protect your business, should the agency err during the collection process.
- Ask the agency to disclose its typical recovery rate and provide you with a list of references. Contact some of the references on the list to find out how long it took the agency to collect on late accounts, if they collected the whole debt or a portion of what was owed, and if they were satisfied with the agency's collection efforts.