Inside a Collection Agency – Your Questions Answered

The collection industry has witnessed a lot of change over the last two years. Social media has had a huge impact on collection practices. Privacy laws are changing rapidly, and we are witnessing an increasingly restrictive regulatory environment. Things covered in this webinar include best in class accounts receivable practices, when to use a collection agency, and what to look for in a collection agency.

Video recording:

Webinar slide deck:

About the speakers: Ryan Frisbie and Marty Demirjian

Inside a Collection Agency – Your Questions Answered Transcript

TOPIC ONE: Best in class accounts receivable practices

TOM: What are the elements of a good credit and collection policy?

MARTY: A good credit policy has written guidelines on who can receive credit and the financial basis for how much credit to extend.

Some elements of a good credit policy are:

Written documentation outlining in house procedures as accounts age

Established credit limits and terms

A required credit application with personal guarantees, if possible

Periodic reviews of the credit applicant’s contact information and credit history

Delinquency process, ending with a final demand

It’s critical to maintain the credit application by keeping it up to date with the latest credit standards. If any clients are beyond terms, that’s a good opportunity to request an updated credit application.

TOM: What elements are important to have on the credit application?

RYAN: A good credit application is a complete credit application!

A credit application must include details about the company, such as how the company is structured, and the year established. Ownership is important to identify. Is the company privately held?

Another important element of the credit application, in relation to extending credit and dealing with past-due accounts, is checking references. Bank references or vendor references are usually helpful.

Past suppliers are another useful source of information and not usually found on credit applications.

If you know they’ve been in business for a while, you can try to reach out to whoever provided them with this product before you. This is a way to follow up on a key creditor of theirs.

A complete credit application includes the usual name, address, phone number, and financial information. Other elements that are often overlooked but extremely important when trying collect on an overdue account are:

Cell phone number

Personal email address

Jurisdiction clause

Banking Information

Permission to contact via personal phone number, email, and home address

TOM: There’s been discussion on the use of cell phone numbers in collections. How does that play into the credit application?

MARTY: You must have permission to call cell phone numbers. We recommend that you have a section on your credit application regarding the use of cell phone

numbers and email addresses. When the credit application is approved with the cell phone clause, it will relieve you of any possible legal violations. It is important to always be cautious with cell phone numbers.

TOM: Are there any other special clauses or terms and conditions that should be included in the credit application?

Ryan: Yes, definitely! Your credit application should provide for the recovery of late payments, services charges, interest charges, potential third-party collection

costs, and attorney’s fees.

Another important consideration is “consent to contact.” For those of you selling internationally, certain countries, such as Canada and the European Union, have very strict privacy laws when it comes to personal information. So, it’s often best for the credit application to include a section stating that the applicant has agreed to receive commercial electronic communications (also known as CEMs), either over the phone or in writing. This is called “explicit consent.”

Most companies rely on “implied consent” when contacting a customer over a past due invoice. Implied consent is based on the premise that if someone has done business with you, either through a commercial transaction or a business service, there is an implied consent that you may contact them.

Implied consent is a bit riskier and the privacy laws are constantly changing. What’s acceptable today, may not be acceptable in the future. For the purposes of the credit application, it’s a good idea to receive explicit consent.

Currently, under Canadian law, if a recipient asks to stop receiving CEMs (whether through your unsubscribe mechanism or by another form of communication), you must respect their request and stop sending them CEMs within 10 business days.

Violation of Canadian laws can result in extremely hefty fines.

TOM: Marty, do you have anything to add about the credit application?

MARTY: Other considerations when preparing a credit application that you intend to send out to potential customers are to ask for tax ID number, email addresses,

and as much contact information as possible.

It may seem basic, or simple, but asking for a potential customer’s website will make gathering information on them a faster process.

Another thing to consider is, do they hold any licenses, or do they have a bond? If so, be sure to thoroughly check with the governing agencies or sureties, to verify. This information can become extremely valuable in the event of delinquency.

I’d like to add one more thing. If personal guarantees are common in your industry, you should always try to get one from your smaller clients. However, personnel from large corporations can’t be expected to sign as a personal guarantor. If you include a personal guarantee on the credit application, many times smaller businesses will just sign them and the individual who signed will then become liable for the debt. If their credit is too weak, you can demand some sort of security.

TOM: So, Ryan, when you process the credit application, do you check with the Secretary of State to see if the corporation is registered?

RYAN: I would highly suggest doing that. Typically, it will give you a company history and their current status with the Secretary of State. Each corporation is

typically required to file an annual report with the Secretary of State. If this report is in good standing, then that’s usually a good sign that the company you’re researching is legitimate.

TOM: If I were to summarize what I am hearing from you, Marty and Ryan, the most important part of good collection practices is to develop a strong credit

application. You can’t have too much information. More information is always better.

Verify:

• References

• Check the Secretary of State records

• Final

ly, make sure your terms and conditions are complete and signed by an owner.

Is that accurate?

MARTY/RYAN: Yes!

TOM: I see a lot of companies fall short because they don’t have a written collection policy. They do it on an ad-hoc basis. Marty, what do you see as best practices for a collection policy or accounts receivable policy?

MARTY: The most important factor is to follow the collection policy once you create it.

The collection policy covers the steps that follow once credit has been extended. This comes into play when an invoice has not been paid in the time frame laid out in the credit application or terms and conditions.

This timeframe can vary depending on what works best for your company, but typical terms are 10, 30 or 60 days.

In the beginning, a good collection policy will start with a reminder of the terms as soon as the credit is extended. An example of this would be calling a few days after the delivery date to ensure product was received as expected. This would be an ideal moment to remind them of the credit terms.

This lets them know you are involved, you pay attention to your invoices, and that you make sure you are prioritized in payment.

When an invoice is not paid in the time expected, the collection policy process begins. First step is a follow-up call. The next step, follow-up the call with a letter.

You repeat this process three times with each call and letter becoming more urgent. The third call and third letter are called a final demand. It should state that if payment is not made within the allotted time period, you will be taking other measures.

The final demand is a key component of the collection policy as it lets you know right where the debtor stands.

If the final demand gets no response, or a completely inadequate response, it’s best to move the debt to a third-party.

TOM: The final demand letter, is that a legal obligation?

MARTY: It is not. You aren’t legally required to send a final demand letter, but it is a good tool. It’s important to follow through with the promise in the final demand,

which is to move to a third party, otherwise you become all bark and no bite.

Communication is key – In this case, the old adage, “the squeaky wheel gets the grease” is true.

TOM: Ryan, anything you can add?

RYAN: Tom, there are a couple of things I can add.

I would really like to emphasize Marty’s point about the practice of reaching out to the customer after they receive the product or service. Confirming that there is no dispute is really important. It will allow you to get ahead of any problems that may exist and address them as soon as possible.

Sometimes the sales representative is a good person to do a follow-up — whoever sold the product is often the best person to initiate the contact. This will allow them to ensure the purchase was executed as expected.

And then, after this initial contact is made, keep a record of it. Especially if there was a dispute.

As far as demands are concerned, we encourage our customers to try and automate as much as possible. For example, send automatic reminder emails — maybe a few weeks — after the delivery of product. This is a good reminder that you’re paying attention.

Any way to communicate more effectively and frequently, I would encourage; through email, phone calls, faxing. Automate as much of this as possible.

TOM: Marty, when do you see in-house policies fail?

MARTY: There are a few elements I typically see that cause policies to fail. Generally, they fail simply because they’re not adhered to.

It’s important to create these policies, keep them updated, and live by them. Although there are elements that come into play that can make it difficult. One of the biggest elements is the lack of resources, which is staffing related. If the people you have on staff cannot efficiently cover the number of accounts you have, it becomes difficult to stay on track with your in‑house policy.

For example, if the maximum accounts your collectors can work on are 400-600 at a time, and then if they are expected to do more than that, the policies may begin to fail here. They are spread too thin and cannot keep up.

Another staffing issue that is common in collections is turnover.

It can be easy to by-pass the in-house policy when you have to keep starting with new people. This happens often.

Another way the in-house policy can fail is by neglecting to follow up on the references.

Or if the sales department overrides the credit department and gives credit to someone that should not have received credit in the first place. Basically, not adhering to the plan.

TOM: Ryan, where do you see policies fail?

RYAN: What Marty brings to light is very important information, which most businesses have had to deal with.

It’s important to consider, does your staff truly understand the credit policy and what’s is at risk? If you don’t have a well-organized credit department, one that understands the credit policy and follows it, you may face trouble down the road. Generally, that’s where we see collection policies fail, when they’re not followed.

TOPIC TWO: When to utilize an agency?

TOM: Marty, when would you say is the best time to hire a professional?

MARTY: When it comes to hiring a collection professional, like a third-party agency, it’s best not to wait until you have a problem.

It’s best to have someone on-hand, situated and decided, before you start extending credit. This will save you a lot of trouble and time.

Once you have an agency aligned, when your in-house policy does not recover the debt and the final demand is ignored and no payment plan agreed upon, then that would be the time to send the debt to your agency.

TOM: Ryan?

RYAN: Every industry has different “red flags” for when a client becomes a debtor.

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  Have they stopped returning your phone calls?

   

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  Are they no longer responding to emails?

   

Every industry communicates differently. For example, I would expect someone who works in the agricultural industry to mostly work by phone. Someone who works in IT may work primarily through business chats.

So, the number one red flag for me in the credit department is communication. If you are not communicating with your customers and you are not hearing back from them,

then that becomes a major concern and an indicator that there’s a problem.

TOM: Again, communication is the key.

RYAN: Right!

TOM: What are five key features to look for when searching for a good agency?

RYAN: There truly are a lot of important things.

But I can name five features that I value the most that I would ultimately not compromise on when choosing an agency to work with.

I put a lot of weight on working with an agency that is headquartered in a state that regulates agencies. This is the first feature I look for. People underestimate the importance of this because they are not familiar with the benefits.

Just like you wouldn’t want to use a bank that’s not regulated, you don’t want to use an agency that’s not regulated either. Not all states regulate their commercial collection agencies. I have known some agencies to purposefully move to states that do not regulate.

The benefit of a regulated state is that they will help you, whenever possible, if you start to have issues with the agency you’re working with. For instance, the agency I work for is state regulated and the state holds the owners of the agency responsible for any funds that have not been remitted to their customers.

There is no recourse in a state that does not regulate, and I have run into the situation with other collection agencies where they had not remitted to their clients. It’s no different than one of your customers going out of business when they owe you money and you never get paid.

Fortunately, you can turn to the government division, like the attorney general, or whoever resides over the regulation, to handle the dispute. They take your grievances seriously and will take action.

I recommend you don’t work with an agency that doesn’t have a trust account. Things like spot audits can be done to ensure they’re handling their collected funds responsibly.

Overall, state regulation is a benefit to you against a bad commercial collection agency.

TOM: Marty, what is the next key feature?

MARTY: Another thing you should look for in an agency is how they handle your sensitive data. This is a topic that my clients rarely ask me about, but they should!

I would ask, “How do you protect the data or information that I send to you?”

I can speak for my agency. We go to great lengths when it comes to data security and make it a priority. There are accreditations an agency can obtain to handle data properly. They can also carry cyber insurance.

When looking into agencies about their data security, get a list of their policies pertaining to how they handle their data and make sure they meet your security standards.

TOM: Ryan, what is a third feature to look for?

RYAN: The third feature I would say is most important in considering a commercial collection agency is licensing in all locales that require licensing. Immediately after

the first call from your collection agency, you should check the agency’s state to make sure the agency is licensed properly.

There can be consequences down the road when working with an agency that’s not licensed, so it’s better to avoid it from the beginning. Some states may demand collected money by an unlicensed agency, be returned to the debtor. Also, a suit could be brought against the agency and usually will enjoin the creditor as well.

TOM: Marty, can you give us a fourth key feature to look for when selecting a third-party collection agency?

MARTY: Having certified collectors is a key feature of a collection agency. Most agencies do not require that their collectors get certified. This is a practice that

agencies tend to implement themselves.

There are two associations that do certifications in our industry – the Commercial Law League of America and the International Association of Commercial Collectors. The two associations banded together to create a certification course that satisfies both of their standards for collectors.

For the collectors to obtain certifications, they must take a course, study the materials and pass examinations. Once passed, the collector is certified. The collectors are given refresher material to keep up with the latest changes and tools in the industry. This ultimately enables the collectors to perform the best at their job.

TOM: Ryan, what is the fifth feature to look for?

RYAN: Lastly, feature number five is to work with an agency that has a user-friendly online client portal. Typically, with a client portal you can look up your accounts

and view their status on your own time. You can see the current status of the collector’s efforts and the position the debtor is in.

Usually, you can create reports at your discretion and customize them to your needs. The report option is great because it gives you the flexibility to grab the data you need without having to contact the agency directly, which can be important if you’re in a hurry and don’t have the time for that.

These are some features my agency’s client portal has and are important and useful to look for when searching for a good agency.

TOM: How can an agency collect if I cannot?

MARTY: One main reason is that an agency can collect a debt that the creditor cannot collect because the agency has more tools at their disposal and their agents

dedicate their time to collections. This simply is because they’re an entire business dedicated to doing this one thing.

Other reasons may be, the debtor is behind and is prioritizing bills. Letting a bill go to an agency has let them know their time is up with not paying their bills.

TOM: How long is an account usually worked on?

RYAN: When it comes to an agency, most allow one collector a certain time frame to work on the account. If the collector is unsuccessful, the account is reviewed by

the manager. Three things can happen here:

• First, the account can be closed. It’s dead and considered noncollectable.

• Second, it’s moved to legal for litigation.

• Third, if the account seems to still have some life to it, a second collector working on the account might be the best answer.

This would be done in the “first period” of collections. This period is normally between 90 and 120 days of receiving the account. Ideally, the first collector can get the job done, if not the second.

TOM: Marty, why use an agency at all?

MARTY: The first reason that comes to mind is to allow the in-house staff to focus on new accounts.

The old accounts can take up a lot of time, but the new ones have a better chance of being collected.

If you don’t have staff dedicated to each part of the process, you can lose out on a lot. Time is extremely valuable in collections.

Secondly, an agency is useful when a debtor does not respond to your final demand letter.

Final demand letters are incredibly useful because they tell you exactly where the debtor is in paying their bill, and you know you have used all your in-house tools.

This typically is a good time to move the account to an agency. If done in a timely manner, the odds of success can be greatly increased.

TOPIC THREE: What if I’ve never worked with an agency?

TOM: Ryan, what should I expect a typical collection process to look like?

RYAN: Every agency has a little bit of a different approach to their process.

Generally, the process begins with a demand letter being sent to the debtor, letting them know that they have been placed with a third-party agency. The letter would include information on how much is due on their account and that it is due immediately.

An initial call is made to the debtor as well, with the same intentions but also seeking additional information. Such as, what is the disposition? Is it a cash flow problem or a dispute? Or is it just falling through the cracks?” Really trying to find the root of the problem.

So, the first week for the collector, the stage is set fairly well.

The collector then works on the account for as long as the agency allows or until the debt is handled. If it is not collected, it is transferred to a second collector or legal department, or the account is closed.

The process generally takes 90-120 days.

TOM: How do you determine when an account should be closed?

MARTY: This decision is determined by the collection manager with the input of the most recent collector who worked on the account.

If the debtor has gone out of business, and there is no security or personal liability, barring other circumstances, the account will most likely be closed. Exceptions can be made for sole proprietorship or general partnerships.

If there is a dispute that can’t be resolved, the agency should make a recommendation as to whether litigation is a viable option or not. This is based on the information obtained during the collection procedure and the balance of the account.

TOM: Why should I pay an agency a percentage of my own money?

RYAN: That’s kind of an oxymoron to me. You don’t really have any money at this point. You’re not paying a percentage of your money; you’re paying to get some of,

or most, of the money back that you don’t have.

An agency has a good place in the world of collections. The tactics do work, for the most part, and they’ll provide money to your bottom line.

It’s important to keep in mind that a sale is not a sale until that check clears the bank!

TOM: Marty, what is a typical pricing model?

MARTY: Agencies generally work on a contingency basis, so they only get paid on money that gets collected.

There can be several rates for each client, depending on the balance of an account. The industry standard is 1/3 for accounts that are under one year old; up to 50% for accounts over a year old, out-of-business accounts, international accounts, or second placements.

If you have a higher volume of accounts to offer, rates typically can be negotiated.

Overall, the two most important aspects to pricing in collections depends on age of the account and volume.

One thing to keep in mind: a low contingency fee is appealing, but it can limit the tools an agency can use on your account, such as a private investigator or an attorney.

TOM: Ryan, how do I get started?

RYAN: To get started with an agency, you need to provide as much account documentation as possible. Such as invoices, credit application, personal liability (if

relevant), and all information regarding your history with the debtor.

The agency itself usually will not require a contract to be signed when working together. Although they will let you know what to expect, their terms, rates and so on.

When it comes to sharing the documentation for the accounts, every agency may have a preferred way. But there are a few methods that most agencies likely practice.

The most common way to share documents is through email or an online portal. Other options include faxing, over the phone, and mailing, but these methods are not used as often.

There are also secure ways to share information, such as Google Drive or Boxit.

Overall, you can get started by talking with an agency to review yo