When it comes to collecting overdue accounts receivable, small businesses are often too patient and wait too long to contact a collection agency, says Francois Sauvageau, president of national boutique agency Collection Systems Canada.
Business owners may know a little bit about collection agencies – they may even have been called by one at their home or office – but few have a good grasp of what a collection specialist can do to chase overdue accounts and improve cash flow.
Small-business clients often fail to set a payment deadline, says Mr. Sauvageau.
"For most clients these days, the small and medium businesses, I would say that after 60 days you should not wait any longer. Rule No. 1 when it comes to receivables is to be impatient. I would say that [waiting too long]is the biggest mistake a company can make."
The gap between what constitutes "fresh" and "old" overdue accounts may explain why Jennifer Heintz has a low opinion of collection firms after unsuccessfully hiring one to seek payment on a batch of overdue accounts.
"We had zero as far as results," says Ms. Heintz, whose Aurora, Ont., firm H.A.R.C. Now Institute provides couples counselling. "One was fairly old, being a couple of years old, but a fairly high one. But the rest were all within a year to … 18 months."
Why hire a collection agency?
The most obvious answer is that businesses typically do an inefficient job at chasing overdue debts, Mr. Sauvageau says. Collection agencies are set up to make money in an area where firms either lose money or to which they devote valuable staff time. Agencies are also more than just an unwelcome voice on the phone, with heavy technological investments in sophisticated computers, call centres and automatic dialers.
When should a company consider hiring a collection specialist?
Size matters. Most larger businesses, such as retailers, use collection firms for problem accounts. For small- to mid-sized companies, Mr. Sauvageau goes back to the 60-day rule. "Most of the time you can tell who is going to pay just based on your first contact with them."
Companies should also act fast on overdue accounts because after two years they can't pursue debtors in civil court, says the president of the Markham, Ont., agency, who also operates a law firm specializing in collections. "A lot of businesses, as soon as they run into financial difficulties … the business owner says, 'Well if they sue me I will pay.' "
What does it cost?
Collection company rates vary based on two factors: how old the debts are (fresher are better) and how much business a creditor has to offer. The cost of chasing fresh debts might run as low as 15 per cent of the outstanding balance, Mr. Sauvageau says, and as low as 10 per cent for large clients with mass accounts such as utilities and retailers. The standard rate in the industry for commercial (business-to-business) accounts is 30 per cent and climbs to 40 per cent after one year. Rates are higher for consumer accounts.
Creditors often get hung up on the percentage that collection firms charge. "The first thing a business owner needs to understand is that when they are going to a collection agency they are not losing money, they are making money. Human nature being what it is, if someone owes you $100, most of us are stubborn and we want to keep that $100."
Does the economic cycle affect the collections industry?
Apparently, yes. The past couple of years have been boom times for collections firms. The recent economic rebound is good news for creditors. More debtors are back in the workplace and have improved their ability to pay.
What is the success rate for collection agencies?
It varies. Mr. Sauvageau says a "good" success rate on consumer accounts would be in the 15-per-cent to 18-per-cent range. At his law firm, for example, the success rate is 85 per cent. That's because the firm works on a contingency basis and investigates the debtor company (and its finances) before agreeing to take on the case. "Winning the case will only give you a judgment that is worth no more than the paper it is written on. Then you need to enforce it."
Should you shop around?
Definitely. While the collections business is regulated, agencies typically specialize based on industry sectors, the size of clients or geography. Mr. Sauvageau recommends that creditors talk to "two or four" agencies before hiring a firm.
Fit matters more than geographic proximity
Because big collection agencies are generally in business to work on similarly large accounts, the largest collectors will often refer creditors to smaller firms such as Collection Systems Canada. Businesses should shop around for an agency through the Internet, he advises, and not feel the need to hire a local firm. "You can easily hire a collection agency in Vancouver. It doesn't matter, as long as the debt and collection agency is fully licensed and bonded in that province."