Hiring a professional collection agency has its pros and cons. On one hand, it can facilitate the collection of outstanding debts. On the other hand, hiring a collection agency means extra costs the company must shoulder. Here are some things to consider before hiring a collection agency:
- The amount of the debt. Hiring collection agencies mean extra costs by way of fees. It also means the amount to be recovered from the debt will be discounted as these agencies normally demand a certain percentage of the recovered amount on top of their hiring fee. It may be more cost-efficient for the company to just write off the outstanding debts in light of the extra costs of hiring an agency in the long run.
- Location of the debtors and collection agency. The location of the debtors must also be taken into consideration. If the bulk of the debtors are headquartered locally, then it is more efficient to hire local collection agencies. If the debtors hold office out of state, then an agency local to those debtors or a nationwide agency is more appropriate. It is important to note that agencies local to hiring company are most likely cheaper than out of state or nationwide agencies.
- The company’s relationship with its customers. How well does the company know its customers? Customers with previously immaculate payment histories may have valid reasons for defaulting on their debts such as death, divorce, temporary unemployment or disability. In these cases, hiring a collection agency may facilitate the eventual settlement of the debts but could also alienate them and hurt the business in the future. The company must be able to provide solutions to customers with valid reasons for defaulting on their loans such as payment arrangements through a department other than the collections arm that will not only ensure the debt is eventually collected and the relationship between the company and customer preserved.
- Company responsibility. Companies should strive to improve their billing and accounting methods to protect themselves from bad debts. Certain companies incur bad debts due to negligence such as hospitals forgetting to bill the insurance or HMO companies of their patients. Individuals and companies will try to conceal their bad credit histories and companies must develop and establish company processes that will enable them to see through machinations of concealment and deceit. They must conduct sufficient background checks on the people and companies they extend credit to. If they extend credit to companies or individuals with bad credit histories, the possibility of that credit turning into a bad debt increases several folds.
Hiring a third party to collect debts may seem convenient at first but like all other business decisions, it is a decision that must be carefully evaluated on its short and long term effects on the company and its customers.
