Due to hire a bill collector?
By Jenny C. McCune • Bankrate.com

There comes a time when the check isn't in the mail. And the number of times that's happening may be on the increase at your company because of the downswing in the economy. Your company can continue to send past due notices or call the overdue account, but when those actions fails, it's time to hire a bill collector.

The biggest mistake that companies make is to put off hiring a collection agency. The older an overdue invoice, the less likely it will get paid, says David Sher, author of How To Collect Debts & Still Keep Your Customers.

"They hold onto their accounts too long because they're afraid to turn it over to someone else," Sher says.

Part of the fear stems from the fees that bill collectors charge -- anywhere from 20 percent to 50 percent of the amount collected. Or some agencies will charge an upfront fee and then a lower percentage of what's collected from overdue accounts. Sher points out though that getting a percentage of the amount owed is better than nothing, which is generally how much a small-business owner may collect on his own from a delinquent account.

Sher advises entrepreneurs to turn overdue accounts over to a collection agency as soon as it has exhausted internal remedies. That is, the small business owner has ascertained that the client has received the bill and isn't holding off payment due to a discrepancy or other problem. "It could be a new account, but if it won't pay, it won't pay," Sher says. "You're better off tackling the problem right away instead of delaying."

To find a reputable collection agency, ask for referrals from fellow business owners, particular entrepreneurs who are in similar lines of business.

Also visit the Web site of the American Collectors Association. Companies can search the ACA's membership rolls online to find prospective debt collection agencies. In addition to publishing information on how collection agencies work, the ACA also certifies members, which can increase the odds of finding a reputable outfit through the trade association. "You don't want to go to the Yellow Pages and pick the first one out of the book," Sher says.

• How long have you been in business?
• Are you bonded?
• Do you keep clients' money in separate trust accounts?
• What's your approach? Do you call debtors, send letters, or a combination?
• How much do you charge? Are there any hidden charges involved?
• Who are your major clients? Do you have any customers with a business similar to mine?
• What type of training do you give your collectors?
• How do you monitor your collectors?
• Do you supply collection reports, and if so, what information is contained in them and how often do clients receive them?

In addition to asking bill collectors about their operations, ask for and check client referrals. When it comes time to selecting an agency, don't choose one solely on price. Debt collection isn't like buying a commodity like a ballpoint pen. A firm that charges less will probably devote fewer resources to collecting what your company is owed. "If their fees are less they are less motivated to do the work for you and will put fewer resources into the effort," Sher says.

Lawyers also do collection work, but Sher suggests that a small business will do fine by hiring a regular agency and only upgrading to a law firm for really intractable cases. Lawyers cost more, so it's best to only deploy them when absolutely necessary, that is, when you've decided to sue to get your money.

In terms of getting the most out of a collection agency, work with them, Sher says. "Treat them like an extension of your office," Sher says. "Give them as much information as you can."

Companies need to achieve a certain size before outsourcing accounts payable will make sense. For instance, Reese's accounts receivable outsourcing firm will work with companies as small as $15 million with between 300 and 400 accounts.

The idea behind outsourcing the function is that a small-business owner can stick to what he knows best, and the accounts payable experts will do such a good job that it will lessen or negate the need to dun for what's owed.

"Companies use collection agencies for accounts that are uncollectable in-house," Reese says. "At that point, they'll expose the customer to whatever is necessary to get them to pay. Your customer may be treated very poorly. You won't want to do business with them again. If a company hires us, we take a more customer service approach."

Jenny C. McCune is a contributing editor based in Montana.

-- Posted: Feb. 26, 2001