What to consider before outsourcing collection of debts
In credit transactions, risks ranging from bounced cheques, late or delayed payment and bad debts occur. Photo/FILE
In these harsh financial times, most customers prefer trade credit compared to price discounts.
This has forced many to bear with the high cost of credit purchases with many defaults being recorded.
For traders, the aim of offering credit acts as a business tool to move sales as well as earn more from risk premiums charged on credit sales.
They offer credit to provide capital to a customer in form of goods or services.
But in credit transactions, risks ranging from bounced cheques, late or delayed payment and bad debts occur.
In such cases, a credit provider is forced to seek an alternative source of capital to keep the business running.
The worst nightmare for a credit provider is bad debts which in most cases have to written off.
But before any write off, there are options that a credit provider can pursue to recover a bad debt from a customer.
This ranges from hiring a collection agency, litigation process and use of auctioneers.
A part from the former, the two options has a self extinguishing effect of eroding any prospect of future business relationships.
This leaves the use of collection agencies as the most preferable means to pursue an outstanding debt without ruining business relationship with a customer.
However, many credit providers still shy away from using debt collection agencies, thinking it is a futile process and are quick to resort to litigation processes or write off the debt.
For effective use of debt collection agencies one must consider these factors;
You have done the job, you have invoiced the work, but the debtor has failed to pay.
Before you can think of passing the debt to a third party for recovery, you have to ascertain the reason behind the default.
The rule of the thumb is; “empathise, but do not sympathise with the debtor.”
Next, you have to exhaust internal systems such as use of internal debt officer or account receivable officers to pursue the debtor with a bid to settling the entire debt or signing a repayment plan towards clearing the debt before passing the debtor over.
Transaction records
Sometimes debtors do down play any internal efforts to recover the debt and in this case, if the debtor is expressing unwillingness to sign a repayment plan or settle the debt, then you should pass the debt file to the collection agency.
Make sure the debtor acknowledges the debt lest it would be a waste of energy. To reinforce this, keep all the necessary records as these could act as your forte.
Even if you have incurred costs trying to pursue the debt, do not impose interest on the outstanding debt unless the debtor is informed as this could give the debtor a leeway to refute the debt and challenge the debt obligation.
Do not pass the debt file to a collector without sufficient proof of transaction.
With all the proofs and acknowledgement of the debt, you are now set to pass the debt file to a collection agency.
You need to assess the reputation of the collection agency that you are planning to hire. What are their success rate and collection tariff?
How conversant are they with the industry and do they have trained professionals to do the work?
What is their growth trend and experience in the industry or their line of business?
The choice of a collection agency determines your chances of recovering the debt and the future of your business relationship with your debtor.
You should be aware that there are those collection agencies that do employ unprofessional approach such as threats to recover the debt, but at the expense of your relationship with the customer.
Although the customer has failed to honour his debt obligation, it not advisable to sacrifice the relationship in the pursuit of debt by hiring those collectors that will use threats to squeeze the debt.
Remember that you can still rehabilitate this debtor as retain him as a cash customer.
What kind of approach do they employ while undertaking their duty?
Usually, it is recommended to pick on an agency that employs debt counselling approach and face-to-face negotiations with the debtor that those that use telephone to pursue the debt.
Albeit being a cheap option, telephone approach has the effect of giving the debtor an impression that he is off the hook of the creditor or collector.
Physical visit and negotiation gives reinforces the gravity of the debt in the debtor’s mindset and enhances his chances of repayment.
Collection tariff
The cost on collection is certainly a deduction on the recovered debt which is an expense.
The cost should be minimal, but you should be weary of those that charge cheaply as this could be detrimental.
Be sure that the commission charged is on successful collection and that the rate is moderate enough to guarantee the survival agency in their line of business.
This is because those collection agents that charge cheap rates are vulnerable to compromise tactics with the debtor.
For instance, if you hire a collection agency that charges three per cent or less on successful collection to collect an outstanding debt of Sh1,000,000, it is obvious that the agency would be tempted to take a compromise token of Sh50,000 from a debtor and keep silent than to pursue the debt tirelessly for only a commission of Sh30,000 or less.
Once the debt has been recovered from the debtor what is your preferred mode of remittance?
Should the collector receive the debt on your behalf and remit it afterwards or should you receive the debt directly with the cheque written in your name.
The choice of mode of repayment has an influence on the success rate.
Directing all the debt payments to the collector could make you lose your cash to the untrustworthy collector or see a transfer of “debtor” title from the customer to the collector.
It makes no sense to start chasing the collector for your cash after recovery from the debtor.
Once you have outsourced the debt recovering to a collection agency, avoid any sideshow with the debtor such as further discussion of the debt or alternative settlement option.
This is because the debtor can employ the divide and rule tactic to stay off the hook of paying the debtor as each of you would not be reading from the same page on the progress of recovery.
