Sending someone to collections happens when a customer fails to pay a business on time.
The business turns the account over to a collection agency that will then proceed to attempt to collect the money on behalf of the small business.
Once the decision is made to hire a collection agency, understanding the next steps how to send a debt to a collection agency will make the experience go easier. Furthermore, the quicker the debt is given to a debt collection agency will increase the odds of the company getting paid in full.
What Does Going into Collections Mean?
If you have customers who are past due, you will send over the account to a collection agency for recovery.
Typically, this is only done after all other avenues have been exhausted to collect the money owed. Below we will cover the steps involved that can reduce a business’s odds of needing to use a collection agency.
Send Invoices Quickly
One common mistake a business makes is not sending an invoice to a customer right away or at worse, not sending one at all.
After the service or product has been provided, the customer should receive the invoice in writing or via e-mail so that they know exactly what is owed and when the due date is.
If the invoice is sent late the customer may assume that the company is not serious about getting paid on time.
Enforce Late Fee’s
In the signed contract or on the invoice sent, a customer needs to realize that late payment will result in being charged a late fee.
If a business fails to notify the customer at the time of invoicing, they will not be able to add on late fee’s.
Often times, educating the customer of the potential of a late fee charge is enough motivation for the customer to pay the invoice on time. If the customer still fails to pay by the due date, a business needs to charge the late fee.
If a business makes a habit of waiving the late fee when a customer is delinquent, then customers will abuse the kindness of the business and continue to pay late. Consistent enforcement of the late fee will reduce delinquency and increase revenue for a business.
Once a business realizes a customer has fallen delinquent, they need to attempt to collect the money. The most efficient way to collect from past due customers is to call the debtor and ask for the payment over the phone.
By calling the customer, it lets the debtor know that the business is serious about getting paid and that the debt isn’t going away.
Often times though, employees of a small business feel uncomfortable attempting to collect the past due money owed and will fail at recovering any money.
When Should You Hire A Collection Agency?
Once the invoice has been sent, late fee’s charge, and in-house collections efforts have fallen short then it is time to bring in a collection agency to attempt to collect the debt.
Overall, the earlier the debt is sent to a collection agency the better odds of successfully collecting the money owed.
Every month that goes by without getting paid, the debt gets harder to collect. Typically, a collection agency will charge a higher rate the older the debt gets because it will require more effort to collect as the debt ages.
It is typically recommended to hire a collection agency either at 30 or 60 days of delinquency. Even if the debt is a year or older, a collection agency may still be able to collect the money owed but will typically charge a higher contingency rate.
What Should A Collection Agency Charge?
A collection agency usually works on what is called a contingency rate. This means the collection agency charges zero upfront and only gets paid a percentage of the money successfully collected.
The average contingency rate can range from as low as 10% and can max out at 50%.
The rate is determined of several factors, including what industry the business is in, age of debt, amount, and type of debt.
Typically, collecting debt from a business is easier than collecting money from an individual.
Getting Paid After Successful Debt Collection
Once the collection agency is able to collect the money then the money is typically remitted on an agreed upon schedule, which can be once a month, once every two weeks, or even immediately.
The collection agency will take out the fee that was agreed upon. For example, a contingency rate of 20% and a payment of $1,000 collected would result in the small business receiving a check or deposit for $800.
If the debtor agrees to a payment plan that stretches over several months, typically the collection agency will remit the payment on a monthly basis.
Most collection agencies will send the money in either a direct deposit into the businesses bank or a check by mail.
We hope that this article will help you feel confident on how to send someone to collections. The decision is never easy but hiring a collection agency for your small business can make a huge difference in reducing accounts receivables and increasing revenue.