Small Business Collections: In-house vs Agency

 
Small businesses have to stay on top of outstanding debts in order to stay afloat. The problem is, collections is a tiresome, time consuming process. You could hire someone, but that’s expensive, and the role may not justify a full-time job. The other option is using an external agency to handle all of your collections needs, which will probably be even more expensive. Both have their advantages, but which is better for your business, agency or in-house?
 
Collections Agency
If you decide to go with a dedicated third party agency, you can either give them a percentage of monies collected or sell an entire portfolio of delinquent accounts. The latter option would get you a fraction of the total value of the original debts, but at least you can wash your hands of them and move forward. However, it’s difficult to tell whether this is ultimately a better option than paying a percentage for each delinquent account. The risks and long-term implications of selling an entire portfolio are often ambiguous.
 
Still, there’s a lot to be said for bidding a permanent farewell to bad debt, even if you only recover a fraction of what you’re owed. For many business owners, the most important thing is to look forward and focus on their core expertise. Anything that distracts from this could be considered bad for business.
 
However, hiring an agency for any purpose doesn’t come cheap. They typically ask for anywhere between 15% and 40% of money collected. Before using a third party, look at what percentage of your accounts are going delinquent, figure out the cost of collecting on those accounts and decide whether using an agency will be profitable for your business.
 
In-House
There are still substantial costs to chasing debts from within your organization, but if you have a good accounts manager who can devote one day a week to collections it will probably work out cheaper than using an agency. Automated collections technology like text messaging and IVR have made the process even more efficient.
 
There are less obvious benefits to keeping the collections process in-house. Maintaining a direct role in how your customers are treated is important to your brand image – even if those customers have failed to pay bills. Bear in mind, not all late and non-payers are malicious. Many face genuine financial difficulties. The more leeway you give them, the more loyalty they will feel towards your brand (the aforementioned malicious minority notwithstanding). Using an external agency means kissing goodbye to a customer’s business; the only thing third party debt collectors care about is recouping the debt, not fostering a positive relationship between your brand and the debtor.
 
The Third Way
Many companies are not willing to risk their customers – even the late-paying ones – being treated poorly by debt collectors. At the same time, they may lack the resources to employ a full-time debt management executive.

Mercifully, there is another way. You can hybridize the two options by dealing internally with the accounts that are more likely to pay, and only selling those delinquent accounts that have become like flogging so many dead horses. Automate the process and you’ll minimize money lost through collections agency percentages, and at the same time continue to nurture customers who may have hit financial dire straits, but are essentially honest. Once they get back on their feet they may honor your flexibility by becoming a loyal customer for years to come.