"Cost of Collection or Recovery Rate Itself, Which is More Important?" That is the Question!

After reading Article #1 titled "Is Your Business Owed Money?" in my series of "Recover Your Business Profits" blog posts, your business should have concluded to use a third party which is a profit recovery company to free up those profits which are tied up in late past due accounts receivable.


However, another extremely critical decision that needs to be considered when choosing which third party profit recovery company to hire is what that third party's recovery rate is!

The fact of the matter is that the largest account receivable losses a creditor will incur has nothing to do with the cost of collection loss against them but rather the loss due to what is not recovered at all.

This is why a third party needs to be hired by creditors no matter what in order to increase the likelihood of recovery and the creditors must remember "the earlier the better"!

Obviously, a creditor wants to pay the least amount possible for the collection and that is why a profit recovery company is better than the other alternatives. However, if that third party's recovery rate record is not substantiated with facts and is not good compared to the industry, whether a profit recovery company or not, then you should look for another third party! Ask to see reports from the third party substantiating results and ask for client recommendation letters supporting this. Ask how that third party compares to the average based upon the American Collectors Association (ACA) statistics. Look to see what reputable magazines and journals like Fortune, Investor's Daily, and Barron's say.

Recognize though that recovery rate is also affected by things outside the control of the third party and here are the 3 most important outside effects:

1) Age of the debt (most important)

2) Consumer or business debtor type (consumers are more difficult to collect from than businesses)

3) Industry or market sector of the debt which really reflects the classification of debtor (for instance if a creditor is from the bail bondsman sector their debtors are criminals and are much more difficult to collect from than if the creditor is from a court reporter sector where their debtors are lawyers and are much more simple to collect from).

So when a third party's recovery rate is looked at, these above points need to be considered.

When looking at reports, look for ones that are similar to your situation and preferably in the same industry or market sector.

When looking at ACA statistics, look for the third party's overall total recovery rate for the previous year across all debtor types and classifications and within a similar aging range (ie. less than 90 days and/or less than 1 year) but it should probably not include debts greater than 1 year old since the number of old accounts included can unfairly taint the statistics and since age is a more significant effect than effectiveness.

Another important thing to remember is that all recovery or collection efforts transition through 3 basic phases as governed by federal law. Written demands (phase 1) must be issued in writing first to the debtor followed by verbal demands (phase 2) where phone calls are made to the debtor and ultimately litigation (phase 3) by taking the debtor to court. It is important to note that the facts show that the greatest percentage (@80%) of debts which will get recovered get recovered in the first phase! So understanding the recovery statistics of a third party relating specifically to this first phase for debt less than 1 year old versus the ACA norm is of the utmost importance. Average phase 1 recovery rates of greater than 40% for debts with aging less than 1 year would be considered very good. Next, understanding the recovery statistics of the third party relating to the second phase for debts less than 3 years old versus the ACA norm should be investigated. Average phase 2 recovery rates of greater than 20% for debts with aging less than 3 years would be considered very good.


To inquire about how you can increase your recovery rate by using a profit recovery company which Fortune Magazine says "... has a collection rate well over 50%" while at the same time benefiting from the flat @$10 fee per late past due account,

call us at

818-710-0244.


Series: "Recover Your Business Profits"
Article: #2 ""Cost of Collection or Recovery Rate Itself, Which is More Important?" That is the Question!"