A collection policy is an important piece of a complete credit policy. In fact, a good collection policy coupled with a thorough lien policy may save a business the time and expense of litigation. While some collectors and collection agencies have rightfully gained a less-than-stellar reputation, a good in-house or outsourced collection program can benefit a business’ bottom line.
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What Is A Collection Policy?
A collection policy is the set of procedures a company uses to ensure payment of accounts receivable.
A collection policy is the set of procedures a company uses to ensure payment of accounts receivables. Similar to the credit policy as a whole, the collection policy should be written and strictly followed. Like a written credit policy, a collection policy serves as a window into the company philosophy as far as how credit and debt are treated.
Further, strict compliance with the collection policy as it’s written allows the business to be more streamlined, with no time wasted on deciding when or how to respond to a certain debtor situation.
Generally, a collection policy systemizes the steps taken to recover amounts due prior to litigation. This includes:
- When customers should be contacted
- How they should be contacted, how disputes are resolved
- When internal or external “collectors” are used to step-up collection efforts
- When and whether to turn the account over to litigation or write-off the debt
Deciding on a Collection Policy
Once the decision has been made to formalize a collection policy, it must be decided whether the policy will be formulated from scratch or whether the disparate pieces of the current collection structure can be melded into a cohesive outline.
Just like a comprehensive credit policy, a collection policy should not be an off-the-shelf or one-size-fits-all product. Each individual business will likely want to treat the collection policy in a different way – some are much quicker to send a sternly worded letter or firm phone call upon late payment, whereas some will let the account simmer for a short period of time.
As with many things in life and business, a moderate approach that balances the reality of the market with the need to get paid according to the terms of the credit extended is likely the best solution.
Strict adherence to the collection policy is generally best in order to streamline collections efforts and exercise oversight of the decision making processes. That doesn’t mean that all clients must be treated the same under the collections policy. Clients with an established relationship, for example, may be extended the courtesy of an extra phone call or a couple of letters before the account gets placed with an outside collection firm.
Business relationships can easily sour over something like sending a delinquent account to an outside collections firm so that knowledge is important in the crafting of a proper policy.
In-House or Outsource Collection
The first part of any collection policy is generally in-house. The question is whether or not the collection policy should keep the whole process in-house, or if it should eventually be outsourced, and to determine when that point comes.
Of course, things like making a nice phone call before the payment is due in an attempt to ensure prompt payment, and even a stern letter after the debt becomes due can easily be handled in-house. However, there are certain things that an outside collection company can do that would strain the time or resources of many businesses.
Outside debt collection agencies can be beneficial for several reasons, including their experience specifically in debt-collection, notifying the debtor that the company has escalated the debt collection process, spending time and resources to continually contact the debtor with letters or phone calls and responding to and locking down promises to pay, reporting the debtor to credit bureaus, and more.
Clearly this must be balanced with the cost associated to use an outside collection agency compared to attempting to keep the process completely in-house. The collections part of a credit policy can often be overlooked, but it is an essential part of a sound and comprehensive credit policy.