Unfortunately, the facts show that for every 100 clients billed at least 3% go late past due and depending on the market sector the percentage may be much higher. To complicate the matter, in the current economic situation, these percentages have been rising.
Now your business is inevitably spending time and resources on trying to get those clients who are late and have not paid to pay. The problem is though that many Accounts Receivable departments spend far too much time internally trying to get those late past due clients to pay.
Numerous expert recommendations have been quoted in newspapers like the Wall Street Journal as well as in magazines like the LA Business Journal stating that after 90 days internal collections should be turned over to an external third party for assistance with the collection. The facts are clear, if a late past due client (debtor) has not paid after 3 months of encouragement from the business (creditor) who has sent extra invoices, letters, and probably made phone calls then they probably will not react to additional efforts. This is why banks foreclose on late mortgages after 3 months of missed payments (ie. 90 days).
Even more important is the fact that, per the U.S. Department of Commerce, a debt which is late starts to rapidly reduce in its probability of being recovered just after 90 days. Just after 90 days, it reduces at its highest rate of 1/2% per day being lost.
What is needed is the involvement of a third party after 90 days to contact the client debtor on behalf of the business creditor. The fact that a third party has the ability to affect the client's credit wields a great wealth of power.
Surprisingly, far too often a third party is not hired by the business though! The two most common reasons given are:
- We have a great A/R group and will handle it ourselves!
- I do not want to offend my client since I want to retain the client!
Relating to point 2, if a client really must be retained then there are ways that a good third party can diplomatically handle the payment pursuit so as to not offend. Even more important is how the business itself responds to the client if and when they call to ask why they have been placed into "collections". The most appropriate way to respond to an irate or concerned key client who is a debtor is simply to say that the billing and collections efforts have been out-sourced, that you were unaware that they were so late in paying, and that if they simply expediently pay you will insure the collections pursuit is terminated. Getting paid on-time even by some of your biggest clients is very critical for your business viability. Do not confuse the fact that a client is large with the fact that they will inevitably eventually pay. How many suppliers do you think considered General Motors or Chrysler as key large customers who they did not want to offend? These same businesses (suppliers) probably tolerated outstanding late payments and did not involve third parties early enough to beat the declaration of bankruptcy which left those businesses "holding the bag" of most the debt at pennies on the dollar! So point 2 also must really be discarded as a valid justification for not hiring a third party as well.
Now that you see that a third party must really be hired to help get late past due accounts receivable collected, the question that must be asked is, "What is the right third party to use?" Well here are the options:
a) Handle it internally by taking it to small claims court if the
debt is small enough
b) Handle it internally by placing a lien on the client's property
if applicable
c) Hire a lawyer to pursue the debt if the debt is large enough
d) Hire a collections agency
e) Hire a profit recovery company
Option a) typically requires allot of internal time to be spent filling in court forms, pulling together backup facts, and attending at least a half day at court. A court fee is also required. With an internal labor cost estimate of a conservative $10/hr., it is quite reasonable to expect at least $200 in cost to be incurred for the paperwork preparation, time in court, and court fee.
Option b) typically requires time to be spent filling in government forms, pulling together backup facts, and spending time at a government office. A government fee is also required. With an internal labor cost estimate again of a conservative $10/hr., it is quite reasonable to expect at least $100 in cost to be incurred for the paperwork preparation, time at the government office, and government fee. Even more important is the fact that no money will be recovered until the property with the lien is actually sold. If there is no sale then there is no money collected and years and years can go by before a sale ever happens.
Option c) will run at least $100/hr. for the most novice of lawyers and can run over $400/hr. for a seasoned expert lawyer. As you might imagine, it would not be uncommon for a lawyer to spend several hours on the simplest of collections resulting in a bare minimum of $200 for the novice lawyer. It would be much more typical though for >30% of the debt to be consumed in lawyer costs and for an upfront retainer to be requested. You also must remember there are internal costs incurred again to pull together backup facts for the lawyer.
Options d) will typically cost 20% to 50% of the amount of the debt whether the debt is collected in the written demand, verbal demand, or litigation phases. This means no profit is left in the collection since very few businesses make in excess of 20% profit!
Option e) will cost a low flat fee of @$10 per late account. On debts over $100, it is highly likely that some profit will be retained after the recovery!
To inquire about how you can benefit from a flat fee of @$10 per late past due account via a profit recovery service which has an average 56% recovery rate in 40 days for accounts turned over before they exceed 90 days late,
call us at:
818-710-0244 .
Series: "Recover Your Business Profits"
Article: #1 "Is Your Business Owed Money?"
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