Almost every small business will have to deal at some point with customers who won’t pay their bills.
Collecting that money in a timely manner while maintaining a good relationship with the client is more likely to happen if the company has established a solid credit policy that includes using a professional collection agency.
An experienced and reputable agency can help the business create a collection process to guide both in-house and outside collection efforts. That’s especially important for small-business owners, who often deal personally with their clients and can be reluctant to push for payment.
“We are a touchy-feely kind of business and one of the first things they educated us on was, ‘Hey, regardless if it’s roses for an anniversary or whatever, you are owed money and the quicker you get on it, the better,’ ” said Mark Silacci, the second-generation owner of Swenson & Silacci Flowers Inc., a florist in Salinas, Calif.
About 6,500 collection agencies operated nationwide last year, collecting $39.3 billion in past-due debt, according to a PricewaterhouseCoopers study released by ACA International (www.acainternational.org), a Minneapolis-based trade group. That’s about 28% of the estimated $141 billion in bad debt that businesses and government agencies charged off last year, the study found.
Most small businesses acknowledge that credit is a vital tool. Customers expect it. A company’s sales often depend on it.
At the same time, a company has to put a lid on bad debt to keep its prices down and profit up. Working with a collection agency -- before the bottom line is threatened by unpaid bills -- can help meet that goal.
“Our objective is not to hound somebody,” said Rodney Meeks, president of the Sacramento-based trade group California Assn. of Collectors Inc. (www.calcollectors.net). “It’s to determine if they have the ability to pay or not and, once we determine they have the ability to pay, that they prioritize our client.”
Collection agency executives dismiss the old stereotype of bill collectors as beefy guys who physically threatened debtors or harassed consumers endlessly over the phone. Tighter federal regulations have helped, as has a focus on professional education and technology.
Today’s collection agencies, they say, can be high-tech, professional partners for their clients, advising them on sound credit policy and offering secured, 24-hour online access to account information.
“The industry has done a tremendous upgrade,” said Richard Hoffman, chief executive of Los Angeles-based Collection Service Inc. and a 37-year industry veteran.
No matter how sophisticated an agency, it won’t be able to recover money on every account a company gives it. Small businesses in particular can find that hard to accept.
“Among small businesses and entrepreneurs, the value of those receivables is heightened and they look to the collection agency to kind of be the savior,” said Sean Escobar, chief operating officer at DRC Services Group in Westlake Village.
Most collection agencies don’t charge a fee unless they collect on a past-due bill. The fee is based on the size, number and age of the bills or accounts receivable a company gives it.
For example, Meeks’ company, Credit Consulting Services, charges a commission of as much as 50% of the amount of the past-due bills a company has turned over. Lower fees are charged on larger accounts, he said. The commission on a commercial account of $100,000 might be 25%, said Meeks, whose father started the Salinas collection agency 37 years ago.
California no longer requires the licensing of collection agencies. That puts extra responsibility on a small-business owner to make a wise selection.
Industry executives and trade groups advise picking a collection agency that specializes in your industry. That’s especially crucial for healthcare businesses. Their collection agencies must follow federal law that protects consumer privacy, among other requirements.
An agency should be bonded and carry errors and omissions insurance. Membership in ACA International and its state unit, the California Assn. of Collectors, can also be a sign of professionalism, industry insiders say.
Ask for and carefully check references and visit the collection agencies under consideration, said Dale Van Dellen, chief executive of Account Control Technology Inc. in Canoga Park. His 15-year-old company, which he owns with his wife and two daughters, specializes in student loan collections.
Determine if the company is financially stable, he added.
“Ask for a copy of their financials,” Van Dellen said. “People in my industry will hate me for saying this, but my government clients want and require audited financial statements.”
Review the form letters and other communications an agency uses to ensure that they are appropriate. Ask for sample contracts.
Check recovery ratios typical for your industry. On average, an agency recovers 20% to 30% of the total value of the accounts it is given. The more accounts it has to work with from a single company, the higher its success rate usually is.
And check whether secure, online access to account information is offered. That can be an important benefit for many small companies.
“It’s almost like picking a bank to handle your money,” industry veteran Hoffman said. “You want to do your homework.”
Once an agency is chosen, request a written contract that spells out all agreements, including how and when payments will be made and received.
Successful collection of bad debt requires a partnership based on communication, industry experts say.
“It’s nice to deposit your accounts and forget about them, but be proactive and involved so we can meet our common goal to collect your money,” Hoffman said.
Pass along new information on past-due accounts to the agency and refrain from making side deals with customers. The agency is still owed its commission if a customer pays a company directly after the account has been turned over for collections.
And don’t wait too long to send past-due bills to the agency. Most industry experts recommend that an account be turned over for collection when it is 90 to 120 days past due. Swenson & Silacci florists turn over accounts once they are 60 days past due.
Following these tips can help a small company match the bad-debt record of Silacci’s floral business, which mails out 1,500 invoices each month. Less than 0.1% of his debts go uncollected, he said.
Using a collection agency has “completely cleaned up our accounts receivable,” Silacci said. “That puts more money into your pocket to develop your business.”
Cyndia Zwahlen can be reached at cyndia.zwahlen @latimes.com.