Outsourcing Commercial Debt Recovery
Outsourcing commercial debt recovery provides companies a viable alternative to the daily stress and challenges of collecting past due receivables from their business clients. This is particularly the case for those clients that have a reputation for paying late or not paying at all on their invoices. Depending upon your company profile, you may find that outsourcing commercial debt recovery is a financially better solution than trying to manage with your internal resources.
Commercial debt recovery represents the collection of delinquent amounts from a business (debtor) on behalf of another business (creditor). Commercial debt recovery (collections) is also known as B2B or “business-to-business” debt collection.
First Party Debt Recovery
When the outsourcing commercial debt recovery is done in the name of the company, not as a third-party collections agency, this is referred to as a First Party collection service. A First-Party agency gets involved earlier in the debt recovery process and has a great incentive to try to maintain a constructive customer relationship.
These agencies are called “first-party” because they are part of the first party to the contract (i.e. the creditor). The second party is the debtor business. First-party agencies try to recover the debt for several months before passing it to a third-party agency or selling the debt account and writing off most of its value.
Listed below are six benefits your company can gain if you decide that outsourcing commercial debt recovery is appropriate for your particular situation.
1 – Outsourcing Commercial Debt Recovery – Increase Efficiency
Outsourcing commercial debt recovery to a third-party agency reduces the time and internal resources your company needs to dedicate to collecting your past due client receivables. This is because their core business function is collecting receivables in a consistent, timely and efficient manner. You then get to focus on your company core business.
They excel at this since they operate as a commercial debt recovery machine. Your business does not.
Debt collections is detailed, sensitive and stressful work. Company in-house personnel often struggle balancing the collections activities with their other job priorities. Outsourcing commercial debt recovery allows you to free up your company staff and resources to focus on other activities that will increase your company’s productivity and revenue.
Your company portfolio of late or non-payments receivables are reduced as the commercial debt recovery agency dedicates their personnel, technology and expertise to monitor and collect payments on your receivables.
Your company goal is a low risk, effective, economical way to reduce non-payments from your business clients. And remember, a debt recovery third-party agency must produce positive results to ensure your company’s relationship.
2 – Improve Cash Flow
Many companies constantly struggle with their cash flow management. The inability to collect payment from past due receivables has a very negative impact on a company because it denies it the cash flow it needs to operate.
To properly manage your company’s cash flow, you must first analyze the components that affect the timing of your cash inflows and cash outflows. Reducing or eliminating cash flow gaps is the key to cash flow management.
The components that will affect your company cash flow include:
- Accounts Receivable – Sales that have not been collected into cash.
- Credit Policy – The criteria to extend credit to a customer.
- Credit Terms – The time limits and penalties you set for your customer payments.
- Inventory – Materials your company sets on-hand for customer purchases.
- Accounts Payable – Accounts that your company owes to other vendors.
If your company offers credit terms to its customers, then your accounts receivable payments is likely the most important source of cash inflows. Hence, your company needs to prioritize this.
Unfortunately an internal staff has difficulty staying in touch with it’s customers regarding their payments. Collecting on your company’s accounts receivable is often overlooked or pushed aside for other business initiatives
Alternatively, outsourcing commercial debt recovery helps regulate your company’s cash flow by ensuring that the rate of customer defaults are significantly reduced. How? By acting as a First Party, they maintain a strict monitoring protocol of your receivables and represent your company’s Credit Terms (due dates, payment penalties, etc.)
They do not have distractions from their core business focus of debt recovery.
3 – Outsourcing Commercial Debt Recovery – Reduce Debt Collection Time
The days sales outstanding (DSO), also called the average collection period, measures the number of days it takes a company to collect cash from its credit sales. This metric shows the liquidity and efficiency of a company’s collections efforts, whether in-house, outsourced or a mixture of both..
In other words, DSO indicates how well a company can collect cash from its customers. The sooner cash can be collected, the sooner this cash can be used for other operations of the company.
The lower the DSO indicates an increase in the company liquidity and cash flows, which are goals of any financial manager.
That is where the option of outsourcing commercial debt recovery can serve a role in your company’s overall collections strategy.
Professional debt collection agencies provide experienced personnel who are comfortable making collection calls and talking to businesses about the debts that they owe your company. They are knowledgeable about rules and regulations that govern debt recovery as well as having the systems and infrastructure to streamline the process.
The result is reducing the average time spent on collections activities per account, with a higher success rate of customer payment. This increases the number of past due receivables collected, reduces the debt collection cycles (DSO) and increases your company’s cash flow.
For companies with high seasonality of sales activities, the use of third-party debt recovery agencies can also serve to supplement the in-house collections personnel to maintain the Days Sales Outstanding, and company liquidity.
4 – Lower Collection Costs
Your company’s success depends upon your customer sales. When your customer accounts become delinquent (late payment), you must decide whether to pursue in-house debt collections or outsource commercial debt recovery to a third-party agency.
Often companies choose to invest in an in-house collection strategy due to direct management of customer accounts and business relations, together with perceived cost savings. However, internal collections often comes at the price of investing valuable time, capital, human resources and emotional energy.
If you consider the cost of hiring, training, and paying employees to perform debt collection, the cost of performing collection tasks in house is often far more than it is to outsource that work to a collection agency.
A commercial collection agency also has the systems and technology that small companies often can not afford. This allows them to administer a company’s accounts receivable portfolio using predictive and trend analytics to prioritize efforts of their collection staff to bring in the highest volume of revenue in the shortest amount of time.
In-house collections versus outsourcing should not be considered strictly a black or white decision for a company. While studies show that internal collection efforts are most effective during the first 60 days, once you are approaching that two-month mark without account success, it is time to consider outsourcing commercial debt recovery.
Outsourcing any kind of work will cost your company money. However writing off bad debt will cost you much more. Remember, each time you deduct an unpaid customer invoice, it requires additional future sales in order to replace it.
Also, most commercial collection companies work on a contingency basis. They only get paid on amounts that are collected. If they do not collect on your customer invoice, there is no charge.
5 – Outsourcing Commercial Debt Recovery – Client Relations Maintained
All client relationships are important and need to be nurtured. Outsourcing commercial debt recovery allows your company to maintain a positive, professional relationship with your indebted clients as they administer the direct communication of collections activities.
Routinely contacting clients behind on their payments takes an emotional toll on business professionals. Reminding your clients that they owe you money, is never an enjoyable conversation. However, avoiding or delaying contact is not a viable option to reduce your accounts receivable.
Contacting delinquent clients as soon as possible in the revenue collection cycle will result in the most favorable recovery rate of at-risk client accounts and return on investment.
A third-party commercial debt collection agency will perform the tasks of notifying, monitoring, and collecting debts on behalf of your business. They have highly trained collection specialists who are fully aware of the need to maintain healthy working relations between your company and your clients. This eliminates the need for your internal staff to remind your clients of the debt they owe you.
They will send timely reminders to your to late paying clients in the form of notifications that prepare and remind them when and how to pay, and the implications of not paying. This creates a healthy relationship with your clients as they will not be “surprised” if there is the need for taking legal collections actions.
This distancing of the debt collection responsibility allows your company to benefit of improved relations with your clients since you act as the “good cop”, while the debt collection agency acts as the “bad cop”, chasing them down for outstanding payments.
6 – Debt Collection Policy
Your clients from the outset of the business relationship need to understand the importance your company places on consistent, on-time payment of invoices. Failure of companies to formalize their debt collection policy, and consistently adhering to it, results in hurting their debt collection efforts.
Why? Their clients to not take them seriously when it comes time to prioritize paying invoices. This is one of the primary reasons for clients not paying on time or not paying at all.
When your clients understand that your company is serious with it’s payment terms and conditions, they are much more likely to adhere to their purchase agreement and pay your invoices on time. This is especially the case if your company debt collection policy states that all past due receivables are automatically sent to a third-party commercial collection agency.
This, of course, requires that your company use a third-party debt recovery agency to implement your debt collection policy for delinquent accounts. This policy needs to be clearly stated to your clients in your company’s payment terms and conditions section of your sales contracts and invoices.
Outsourcing commercial debt recovery provides your company the means to consistently adhere to your debt collection policy. Professional communication, with regular reminders being sent to late paying clients is important in the collection of delinquent accounts.
This helps keep debtors informed that your company is serious about collecting overdue payments. They are reminded that they are late paying their debt to you and legal action may be forthcoming if they do not pay you.
A formal debt collection policy, consistently and professionally managed, streamlines the debt recovery process, minimizing client payment excuses and results in lowering defaults in your accounts receivables.
Outsourcing commercial debt recovery helps companies improve cash flow by reducing customer bad debt. They strengthen client relations, lower collections costs, and reduce the waste of internal company resources, and the time and distractions related to commercial collection activities.
For your company it can be less expensive using a third-party commercial collection agency when combined with your existing in-house collections resources. Working together, both parties can consistently implement your company debt collection policy, resulting in more consistent, on-time customer payments and lower default losses.
There are six benefits to outsourcing commercial debt recovery: These include: 1) Increase Efficiency; 2) Improves Cash Flow; 3) Reduces Collection Time; 4) Lowers Collections Costs; 5) Client Relations Maintained; and 6) Formalizes Debt Collection Policy.
Please call us at (888) 339-6699 to discuss how our commercial debt collections services will serve your business needs or Contact Us.