Bad debts affect small businesses more than large businesses. Large businesses have the buffer to survive bad debts while small businesses do not. If small businesses do not get payments on time, they cannot reinvest in the business for lack of funds and have to stop operations. Many small businesses have actually shut down because of their inability to recover bad debts.
Why is it difficult for small businesses to collect bad debts?
Some of the factors that make collecting debt especially difficult for small businesses are described below:
Avoiding unpleasantness: Collecting debt is an unpleasant task. As the business is small, its focus is on getting more business and retaining existing customers. Despite the fact that customers are in the wrong in delaying payments, the business will not remind them of the dues too often for fear of losing further business. Customers understand the predicament of small businesses and take advantage of it.
Short of resources: Small businesses do not have the resources to recover bad debts. Collecting debt requires keeping accurate records of debt and credit transactions, sending out reminder letters regularly, calling up customers, visiting customers and regular follow up. This needs time, manpower and money. Small businesses are short of all three.
Using in house staff to collect debt: Small businesses try to save money by recovering bad debts themselves. The business gives the responsibility of debt collection to an Accounts Receivables person. This is not very effective and rarely results in quick debt recovery.
Firstly, the Accounts personnel are already swamped with work, and cannot put in the required time and effort to collect debt. Secondly, debt collection is a delicate task that needs to be handled with finesse. Accounts personnel can in fact spoil your customer relationships by being tactless. Thirdly, in house personnel may not be aware of the state and federal laws regulating debt collection. Violation of these laws will cost your business more by landing you in legal trouble.
How does a collection agency help small businesses?
Collection agencies can help small businesses improve their bottom line considerably. Many collection agencies deal with small business accounts, and charge accordingly. The fact that you have partnered with a collection agency will make customers take you more seriously.
Collection agencies have skilled staff trained in debt collection strategies. They are well versed in debt collection laws and have a professional and cordial approach towards customers. The collection agencies will charge a fixed rate or a percentage of the debt they collect. They have greater incentive to recover debt faster.
Collection agencies collect debts through a four phase process. The process involves sending out demand letters to the customer, contacting customer through phone, reporting customer to a credit rating bureau and filing a lawsuit in case of non payment.
The demand letters or notices sent out by the collection agency give details of the debt, the amount due and a payment due date. The third and last demand letter warns the customer of being reported to a credit rating bureau if the payment is not settled by the specified due date. The warning will push most customers into settling their dues as a report to credit rating bureaus will hurt their creditworthiness.
Collection agencies fall cheaper in the longer run, as they recover the bad debts you would otherwise write off. Collection agencies will recover your debts in a professional manner, thereby enhancing your customer relationships. With a collection agency as your partner, you can focus on your business operations without worrying about funds.
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