Q4 Credit Research Foundation News

crf-cover-q4As published on page 29 in the Q4 Credit Research Foundation News
Editor’s note: This story is the second in a series on successful debt collection. Part I, which focused on improving in-house collections, was published on page 19 in the Q3 CRF News.


cohen_gregBy Greg Cohen


President, International Association of Commercial Collectors

President & CEO, Caine & Weiner

Your credit department has called, emails and sent letters. Your customer has made and broken payment promises, or perhaps has stopped taking your calls altogether. Further internal effort will likely bring only frustration and a waste of time and money. You know circumstances like these require a collection agency. But you might not know all of the steps you should take to increase your agency’s odds of successfully collecting the debt. It comes down to forging a partnership based on effective communication, information sharing and trust.

Choose the Right Agency

The first step in building a great partnership is choosing the right partner or partners. If your volume of placement warrants it, best practices usually dictate creditors having at least two agencies, which both maximizes your net back, encourages a friendly competition among agencies that benefits your company, and protects you if one collector fails to meet your performance expectations, goes out of business, etc. Of course you want to choose an agency with a successful track record. But in collections, the end never justifies the means. The wrong agency can sever otherwise salvageable customer relationships, damage your professional reputation, or even land you in court.

Be sure the agency has high ethical, professional and legal standards


Before considering an agency, request proof that they:
Have a bond protecting against defalcations – that’s the official word for when an agency or attorney collects money owed to you, but doesn’t remit.
Have a trust account, a separate bank account for all money related to a collection claim that prevents the co-mingling of your money with their money.
Are regularly audited by a third party.

Here’s a shortcut: Ask if the agency is certified, and by whom. Knowing the certifying body allows you to Google that organization to find the specifics requirements. Also ask about professional trade organization membership, as these impose additional requirements. For example, some trade organizations have strict measures in place to ensure quality and integrity. They may include binding their members to a Code of Ethics, and requiring them to pass a rigorous reference check, having a bond requirement and maintaining a separate trust account for all client money. Association membership also brings opportunities for continuing professional education and a national and global network of other agencies and collection attorneys.

handshakeAn agency is only as good as its agents: What training do they receive?

“When we hire a new collector at ABC, we tell them we don’t want anything that collector does or fails to do to negatively impact our client’s relationship with their customer,” said ABCAmega

Senior Vice President Robert Tharnish. “Once the delinquent amount is resolved, it is the creditor’s decision if they want to do business with their customer going forward.”

When asking about agent training, listen for lessons on:

Compliance. The laws that govern collection are constantly changing. They also vary from state to state and country to country. You need an agency that thoroughly trains agents in all of this complexity and provides them with regular updates on the changing compliance landscape. This is not optional! A violation may land your company in court alongside the agency you hired.
Telephone and letter writing skills. Poor grammar, for example, makes a terrible impression. The agent may also be taken less seriously.
Collections legal process. Your agency should be able to answer your questions about next steps. This is especially valuable if you have international customers.
Debtor psychology. The successful collector knows how to persuade debtors that paying your debts benefits them.

Is this agency a good fit for your company?

You’re wise to choose an agency familiar with your industry. Agents who understand the industry’s business cycle, challenges and jargon will build a better rapport with your customers and be better able to negotiate reasonable payment plans or conversely, recognize a snow job. Know what your needs and wants are before building the contract, but also seek an agency nimble enough to adapt if your needs vary by customer or change over time.

Do you need to outsource some or all of your first party collections? If so, consider looking for an agency that does both for the most seamless transition. Generally, agencies will use your company name when processing young debts, then use their name when collecting any accounts that age into collections.

The right agency will be willing to build a collections program to your specifications, which are usually memorialized in a service level agreement. This might include how many contacts with the debtor you want prior to attorney referral, for example, whether this should this be constant or vary by account, or if you never want an account referred to an attorney without your direct permission. Additionally, you will want to consider the controls you have in place for each decision point and where in the relationship they are positioned.

Just as important is the tenor of those contacts. You may know from experience that your customers respond best to blunt language and a professional but terse reminder of consequences of not paying what you’re owed. But you might also prefer a softer approach, at least in some circumstances.

Lee VandenHeuvel, President of Ross, Stuart & Dawson, shares a story of how kindness recently motivated a debtor involved in a claim placed with his agency by a Fortune 500 client to pay. “We said something like, ‘Hey, we are working on this issue for our client, we just received it. I see another agency has already contacted you. Could you just tell me what has happened over the last 12 months, and walk me through what, in your opinion, led to this, and what we can do to get rid of this thing?’” VandenHeuvel recalled.

“What they said to us was, ‘You’re a lot nicer than the last agency that called us. You’re just telling me to help you solve a problem. Because you were so nice to me, I’m putting this on top of the pile for our next check run.’”

The bill was paid within two weeks.

Set Communication Expectations – and Meet Them, Too

Once you’ve chosen an agency, it’s time to build your partnership. As with any partnership, open communication is an essential part of your onboarding strategy. Early on, you will together put into writing some of the wants and needs discussed above. This is also when you let the agency know how often you expect reports on account progress.

If you are placing thousands of relatively small claims, you may choose to only receive monthly or even quarterly results reports on the amounts placed, amounts collected and your cost, and otherwise hear from your agency only if they have a question or need you to authorize a payment plan, claim settlement or legal action. Conversely, if you place a small number of large claims, you may want regular progress reports along the way. Technological advances have allowed most agencies to be so open that you can electronically view the current status of any of your claims, even reading the notes agents made after each debtor contact.

Expect your agency’s liaison to regularly touch base with you to see if any of your needs have changed. Never hesitate to initiate contact, however.

Partnerships are two-way relationships, and it is almost as important for you to respond quickly to your agency as it is for your agency to respond quickly to you. “Responsiveness is the number one issue we face with clients day-to-day,” Tharnish said. He offers a hypothetical example based on actual ABC-Amega experiences: The agency gets a debtor to agree to pay $1,000 per month to clear a $5,000 debt in five months and recommends the client accept. “It takes three months for us to get a response for the client, and we could have had it more than half done by then,” Tharnish said. “There’s nothing we can do except keep prompting the client to respond.” It’s not just about clearing the debt quickly, Tharnish said, it can risk clearing the debt at all. “The longer we wait to get back to the debtor, the more likely they are going to change what they can do, and the stronger the signal that the creditor is not really serious about collecting the debt.”

Documents/Information to Collect and Share

Think about this: 37% of respondents to a late 2015 survey of International Association of Commercial Collector members said that missing or incomplete documents are the greatest obstacle to successful collection. “Documents detailing what the debtor ordered, and what was delivered and when, are commonly missing from the information a commercial collector receives,” said Joe Batie, Chief Commercial Officer at Caine & Weiner. Batie estimated that 55 to 60% of clients send incomplete records.

This means creditors can overcome a significant obstacle to collecting overdue debts by gathering the right information before the sale, then documenting orders of goods or services and confirmation of receipt, recording any additional correspondence with the customer, and sharing with their agency.

A good collection agency will help you refine your documentation process, so ask for guidance if you want some, said Tony Terry, president of Continental Recovery and Filing Solutions.

The most important pre-sale document is a properly constructed and fully complete credit application. Terry said every credit application should include the names of the company’s principals, along with home addresses and telephone numbers, and, as often as possible, a personal guarantee. The first provides additional means of contact should, say, the company go out of business. The second
gives both internal and third-party collectors significantly more leverage. Don’t grant credit unless every field is filled!

Every company should also require banking information on its credit application, as most states allow judgements to be levied on the customer’s bank account. He offers this additional tip: “When you get your first invoice paid from a customer, make a copy of the check they paid you with and throw it into their file. Sometimes the bank account they put on their application for credit is not the same as the one they are paying you with.”

Other documents collection agencies find useful include the contract or order, proof of delivery or proof of service rendered, and any correspondence with the customer prior to placing the account with the agency. These documents provide information that can help persuade a debtor to pay or, if necessary, lay the groundwork for a lawsuit. Missing documents allow a debtor resisting payment to stall, or even make up their own version of events.

Ask your agency which documents they consider helpful. “We ask our clients to give us all of the documentation, including the purchase history, notes on conversations with the debtor and any email strings,” VandenHeuvel said.

What’s often missing: A signed agreement for goods or services. “Believe it or not, a lot is done verbally,” VandenHeuvel said. If you’re doing any business this way, please stop! “I don’t care if you have a dated email, or something written on a bar napkin –I need something where your customer has acknowledged the purchase and agreed to move forward,” he said.

Collection agencies are good at spotting trends among the documentation you provide on the accounts you refer, including information that is frequently missing or insufficient. Ask.

Know When to Say When

It can be tempting to keep on trying to collect an overdue account in house. The longer the history with the customer, the bigger the dollar amount overdue, the harder it can be to send the account to collections.

But the older a debt gets, the less likely it is to ever be collected (see chart). Old accounts are also frustrating and bogging down the credit department, usurping credit professional energy that could be better used reminding current customers to stay current or collecting debts only slightly past due.

“The longer you wait, the more time the late-paying customer has to abandon the debt or go out of business,” Batie said.

While your agency probably wishes you would turn accounts over sooner, ultimately, only you can set the maximum tolerance before accounts are sent to collections. But whatever that number, please watch for these red flags that indicate the need to act immediately:

Broken promises of payment.
A change in debtor company ownership – remember the new owner may have only purchased assets, not liabilities, and the old owner is trying to leave the past behind!
Failure to respond to demands for payment. Unreturned or ignored phone calls.
Changes in payment patterns or in means of payment – a customer who used checks suddenly switches to a credit card, for example.
Reports of strange happenings from your sales staff – this one deserves its own section. Read on.

clla-debt-collection-date-graph

The Role of Sales in Collections

Your sales force may see signs of significant trouble long before a debt ages into collections. It’s hard not to notice a “going out of business” sign in the window, or a significant drop in staffing or inventory.

There’s no doubt the credit department would benefit from this information, but it is also undeniable that many sales people would hesitate to report those signals to the credit department – they fear losing a customer.

One way to encourage sales to be more open with this type of information is the commission charge back. “If the deal goes bad, if the customer doesn’t pay, the salesperson doesn’t get or must pay back their commission,” Tharnish said. “This creates an incentive to sales to provide any information that might help collect the claim.”

Recognize Victory

It’s easy to recognize success when your agency collects in full. But what about those times when less than 100% is offered by the debtor? Trust your partner. Your agency will recommend action based on prior experience and research of the current situation.

“When a settlement is being offered due to financial difficulties, and we are able to confirm that, and the settlement is reasonable, then we are going to encourage our client to accept it,” Terry said. “If a settlement is being offered due to a dispute over the debt, we look at each case on its own merits. If there are threats of counter claims from the debtor and any credence to the debtor’s claim, or inability for the creditor to refute their dispute, we will also recommend acceptance of a reasonable settlement.”

A few years ago, Tharnish was handling a claim from a client in China who said a customer in Columbia owed $50,000. The debtor said only $40,000 was owed, and produced documents that said so.

The creditor insisted, document be damned, they were owed $50,000, then admitted giving their customer the $40,000 documentation so the customer would not owe as much to customs.
“The creditor and the debtor were in collusion to defraud
customs in Columbia!” Tharnish said. “I told the creditor they
had better take that $40,000.”

It’s not usually prison that’s at stake with unrealistic expectations, but the bottom line. Let’s say a debtor owes $50,000, but offers to settle for $45,000. Court costs are $5,000, so even if the creditor
wins the lawsuit, the net is still $45,000, and victory is not guaranteed. So of course the creditor should accept the $45,000, right?

If a creditor is angry with the debtor, and unable to see past that anger, the answer may be no.

“If you allow emotions to drive your decision-making model, you and your company will usually end up on the short side of the equation,” said Thomas E. Brenan, President and CEO of Altus Global Trade Solutions. “It is always best to compare the costs to the projected return.”

Just as the ever-changing business landscape requires you to be open to new ideas, advances in technology, new opportunities and best practices, you need a collection agency or agencies that do the same. Because any agency you work with is in effect an extension of your credit department, you also want to choose only agencies aligned with your company’s core values and expectations. Open
communication, careful documentation, and the sharing of information are what allow you to ensure you have chosen the right agency and build the strongest and most effective partnership together.

Greg Cohen is president of the International Association of Commercial Collectors (IACC). A credit and collections industry veteran of more than 20 years, he is also President & CEO of Caine & Weiner.