I’ve mentioned that a collection policy is an important part of a company’s overall credit management scheme. And, that a good collection policy, coupled with a thorough lien policy, may enable a business to generally avoid getting to the litigation portion of their credit policy. An integral part, and a good first step, of a collection policy is determining whether your collection department will ultimately be in-house, or outsourced. And, as previously discussed, the complexities of determining whether a collection policy should be in-house or outsourced, and even what steps a collection policy should take, are not one-size-fits-all.
Collection Policy Procedures Generally Start In-House
Generally speaking, the first steps of a business’s collection policy occur in-house. After material or labor is extended on credit, and payment has not been received, there is likely a form letter or generic phone call from the business to the debtor requesting payment.
Much of the early work in attempting to collect a debt is easily, and perhaps best, done in-house.Depending on the size and complexity of the business, these first steps may range from a letter typed by a secretary, to a phone call from the company owner, to a set formal correspondence strategy implemented by a distinct credit and/or collection department.
Much of the early work in attempting to collect a debt is easily, and perhaps best, done in-house. After all, the business extending the credit may be in a good position to facilitate a payment soon after it becomes due; the work is known, the amount due is known, any acceptable payment plans or reduction of debt is known, and there is already a relationship (albeit potentially strained) with the debtor.
It May be Beneficial to Outsource Collections After Initial Attempt at Recovery
After an initial attempt to recover a debt is unsuccessful, the real decision of whether to outsource or continue with in-house collections begins. While it may seem cost-effective, and more efficient, to keep the collections project in-house there are numerous factors to consider. There are many things that an outside collections firm can or will do that would likely strain the time and/or resources of many businesses.
Choosing whether a collection policy keeps collections in-house or outsources overdue projects to an outside firm must be a business-by-business decision.An outside collections company is likely to be more effective than non-specialized in-house collectors for the simple reason that it is their job to collect overdue debts, and they have experience in dealing with the intricacies of effective debt collection. Further, the use of an outside debt collection firm notifies the debtor that the company has escalated the collection process. Finally, since it is their job to collect the debt, an outside debt collection company is willing to expend the time, energy, and resources to continually contact the debtor with letters or phone calls, responding to and locking down promises to pay, reporting the debtor to credit bureaus, and more.
The threat of reporting a debtor business to a credit bureau can be an very effective tool to recover a past due payment, but few companies make use of it. The ability to send a project to an outside collections firm and then, for all intents and purposes, forget it until payment is made is a luxury that must be weighed against the commission charged by an outside firm. While the price of an outside collection firm may seem steep, it is worth remembering several factors: namely, that collections firms generally work on a commission basis, that their only job is to collect debts, and that the time not spent by company employees on attempting to collect the overdue payment is time gained for your company. The collection process can take a large amount of time, and if the collections process is outsourced there is no lost time for your business – and the process is overseen by individuals well-versed in the technical tools and techniques required.
Choosing whether a collection policy keeps collections in-house or outsources overdue projects to an outside firm must be a business-by-business decision. There is no one right answer to this question, and various factors can have a large influence. The number and size of overdue projects that a business regularly encounters has an effect on the collection policy, as does the presence or absence of a specialized internal collections department. Whichever way a business chooses to go, however, the important point is that a decision is made. Deciding how overdue projects are to be collected is the most important part of a collection policy – and can be crucial to a business’s bottom line.