There are lots of challenges involved in running a business. Common lore suggests a successful start-up takes up to five years to break even. As for the unsuccessful ones, the bulk of them end up insolvent, which makes it hard for their creditors to recover their funds.
Best practice for debt collection is to pursue the debt as soon as possible. The longer it remains outstanding, the less likely it will get paid. The usual period is 90 to 120 days. After that period, you should probably hire a collection agency.
There are two main entities that follow up on debts. The first group is the legally compliant collection agency. The second group is the less scrupulous debt buyer. From a customer’s perspective, there’s no visible difference. Both these groups send people to collect the cash you owe. Debt collection agencies earn a commission for every debt they recover.
Debt buyers are a little different. They buy bad debt from creditors. This means they find the debt that has been written off, and buy it for a fraction of its value. If for instance, you owe a company $1,000 and they couldn’t make you pay it, they might sell the debt for $100.
The debt buyer can then come after you on their own, and if they can make you pay, then they get to keep the full amount. They effectively make a profit of $900. Because they get to keep all the money for themselves, they are far more aggressive in their methods.
From a debtor’s perspective, anyone that is chasing them for money is the same. They can’t easily tell whether they are dealing with a debt buyer or a genuine debt collection agency. So they may end up thinking all debt collectors are frightening, and that they are prone to harassment and inappropriate behaviour. That’s why it’s important to select the right agency, making sure they show your company in a positive light.
You might not think your reputation matters to your debtors. After all, once you regain your cash, you probably won’t do business with them again. By refusing to pay what they owe, they have already identified themselves as being untrustworthy. But even the worst criminal has friends and family that listen to them.
If this debtor develops a bad attitude towards you and shares that negative opinion, it may cost you customers, and that affects your bottom line. So hiring a good debt collector goes beyond financial management and veers into public relations territory.
When you’re looking for a debt collector, find out whether they are licensed. Debt collection is regulated by ACCC (Australian Competition and Consumer Commission), and ASIC (Australian Securities and Investment Commission). They have a set of prescribed practices that they recommend and sometimes enforce.
For example, a debt collector should avoid visiting you at home, and they shouldn’t contact you after hours. They can only call or email you ten times a month, and only between 7.00 a.m. and 9.00 p.m. On weekends, they can’t call you before 9.00 a.m., and they’re not allowed to get in touch on public holidays.
If a consumer complains that somebody broke these regulations on behalf of your company, you could face fines and prosecution. As you interview your debt collection agency, ask them questions to find out how familiar they are with debt collection regulation, and what their agency policy is regarding it. It’s important to secure a law-abiding agency.
They might not overtly tell you they disagree with the stipulated requirements, so you can ask them specific questions to find out their preferred methods of debt collection. You should also find out about their charges. Many agencies will bill a percentage of funds recovered plus expenses. This is a more cost-effective option than a monthly fee or retainer.
Debt recovery sometimes requires time in the courtroom, so it helps if your collection agency has access to a law firm. If they are partnered or have a working arrangement with lawyers, they can negotiate a more reasonable fee for legal services, which saves you money. Having a collection agency that’s affiliated with a law firm makes the whole process run more smoothly.