Should You Outsource Your AR Collections?

Anyone who deals with AR collections knows what a time-consuming and frustrating experience it can be. It is more so for smaller companies since they don’t have dedicated staff to handle collections and instead must divert resources to the task as needed.

There’s a better way to deal with AR collections, and that’s through outsourcing. Collections aren’t a core competency of your company so outsourcing collections isn’t the same as giving up the secret sauce. In fact, it’s just the opposite. There’s plenty to gain from outsourcing your AR collections. In this article, we’ll look at the benefits of outsourcing collections and when you should consider doing it.

Cost and Experience

You may not realize it but in-house AR collections are expensive to run. Once you add up all of the costs, you might be surprised at how much is being spent in this one area. Consider what’s involved with collections:

  • Skip tracing database.
  • Analytics software.
  • Knowledge of federal, state, and local laws and rules.
  • Ability professionally to handle rude customers.

Collections software, such as skip tracing and analytics, is expensive. However, such software is needed to run efficient collections. Skip tracing software is used to locate people. Analytics software is used to analyze your AR for potential late payers or even defaults. Analytics software can scan your AR to identify trends as well, helping to resolve potential late payment issues before they even happen. The results from analytics software can be incorporated into your credit application process, weeding out potential credit risks before they even have a chance to enter into your system.

If the above sounds like a lot, it is. Running proper AR collections takes specialized skills and knowledge. Additionally, consider the expense associated with older debt sitting on your books.

Source: https://www.pmaa.org/weeklyreview/attachments/AmerAssist%20The%20Hidden%20Cost%20of%20Managing%20Your%20Accounts%20Receivables.pdf

Notice the last line: bad debt. At 90 days, bad debt is costing 6% of receivables. At 120 days, it shoots up to 10%. If outsourcing collections cost less than the above, it’s time to consider outsourcing.

The myriad list of rules and laws surrounding collections don’t make things any easier. Not done right, you can end up incurring steep penalties. From the FTC’s website:

You can sue a collector in a state or federal court within one year of the date the law was violated. You can sue for damages, like lost wages and medical bills. If you can’t prove damages, you can still be awarded up to $1,000, plus reimbursement for attorney’s fees and court costs. A group of people suing as part of a class action lawsuit can recover money for damages up to $500,000, or one percent of the collector’s net worth, whichever amount is lower.

These rules and laws from federal, state, and local governments also change.

“States may have additional restrictions and may not allow [debt collectors] to contact a spouse,” said Dan Dwyer, an attorney in the division of financial practices at the Federal Trade Commission, to creditkarma.com.

Would you have known the above? If not, consider outsourcing your collections.

Customer Relationships

Let’s face it, chasing down people or companies to collect money is not a fun job. Handing this task off to someone who specializes in collecting debts can help maintain morale in your company. It also removes your company from the collections picture. Instead of pointing the figure at you, customers must deal with the collection agency. As bad as collections might seem, having a third party doing the actual collecting may help maintain the customer relationship.

Where to Outsource Your Collections?

Collection agencies collect on old debt from individuals and companies. Simply do an internet search for collection agency followed by B2B or B2C, depending into which segment you fall.

From the search results, how do you decide which agency to choose? It will take some time to choose one of the many agencies. Here are a few things to consider:

  • Reviews on Google and Trustpilot, if available.
  • Better Business Bureau rating, if available.
  • Compare pricing to other agencies.
  • Do they offer all of the services you are seeking?
  • Find an agency that specializes in your area of business.

When looking at reviews on Google or Trustpilot, you are likely to see many reviews from consumers who are in collections. Those aren’t the reviews you are pursuing. You want to see what businesses have said about the company. How was their experience in having debts collected?

Depending on how resource-constrained your company is, you might consider outsourcing AR. If that’s the case, finding a company that can handle AR and collections will save you even more time and money since you only have to deal with one company instead of two.

Also, consider that an outsourced AR collections company doesn’t get sick, and if someone quits the company, your business doesn’t suffer. Your AR and collections will have high reliability.