All businesses face cash flow issues during challenging economic climates, making it especially difficult to collect customer payments within the agreed-upon terms. To optimize your collection efforts and cash flow, it is essential to reevaluate the priorities of your collection department, including the utilization of third-party collection agencies. Making timely referrals to these agencies for bad debts can significantly improve collection results while minimizing unnecessary costs.

Is Using an Agency a Collection Failure or an Integral Part of the Process?

• Needing a collection agency does not represent your department’s collection failure, as a certain percentage of all customers are destined to fall into this category regardless of how hard to try to collect.
• When your collector staff exhausts their efforts without yielding results, there comes the point of diminishing returns. In such cases, a timely collection referral can be a victory for your company.
• Holding onto past-due accounts for extended periods diverts your staff’s attention from high-priority customers and balances, which are more profitable. Continuously pursuing payment from those who consistently fail to pay is an unproductive use of resources.
• By allowing collection agencies to handle difficult cases, your internal collectors can focus on where the cash comes from rather than being tied up with long overdue unpaid balances. The longer an account remains past due, the more challenging it becomes to collect. Collectability decreases each month to the extent that after nine months, the likelihood of collection may be close to zero.

Important! Your past-due customers will seek other suppliers and you will lose business if you do not collect. Consequently, integrating timely collection agency referrals into your collection process is essential.

Considerations for Collection Agency Placements:

1. Utilize your internal resources for accounts 10 to 90 days past due, as they contribute 95% of your cash flow and offer a high return on your time investment. Allow your staff to focus on the accounts receivable that keep your business running.
2. Waiting beyond 90 to 120 days and hoping for collection before referring the account to a collection agency is counterproductive. Timely interventions are more likely to succeed.
3. Assigning accounts to a collection agency immediately grabs customers’ attention as they realize that the unpaid debt could negatively affect their credit bureau scores.
4. Collection agencies charge fees based only on the cash recovered, and a reputable agency increases the chances of successful collection.
5. The agency can tailor their collection tactics, employing a customer service approach when you hope for future business and a more assertive approach for chronic late payers.

When is the Right Time to Refer a Debt for Collection?

Consider the following five factors before deciding to refer a customer to a collection agency:

1. The account is 90 days late.
2. The customer has failed to follow through, broken a promise to pay, or become difficult to reach.
3. The customer has indicated financial difficulties.
4. Remember that your customers prioritize their cash payments, and they pay those who have taken more aggressive actions or whose products they need. You have become a low priority and will lose future revenues if you do not collect.
   
   

What to Look for in a Collection Agency:

When selecting a collection agency, keep the following eight factors in mind:

1. Membership in a professional organization such as the International Association of Commercial Collectors (IACC) upholds a strict code of ethics and legal compliance.
2. Agencies specializing in either B2B or consumer collections. Collecting from businesses is more challenging and requires specialized expertise. If you have commercial debt, choose a commercial bad debt agency.
3. A well-established track record, having been in business for many years.
4. The ability to communicate with the agency’s management before initiating business and during the collection process. 
5. An excellent history of collection results and adherence to market-standard contingency fees.
6. Strong reviews, such as positive feedback from clients on platforms like Google, indicate trustworthy and quality relationships.

Managing receivables is a crucial aspect of B2B financial management. Late or unpaid invoices and bad debts can significantly impact cash flow, causing businesses to struggle to meet their financial obligations. Companies rely on various tools, including payment and credit scoring, to prioritize their B2B collection activities to stay on top of outstanding payments.

Payment history is an essential tool for managing B2B collections. It provides insight into customer behavior and can be used to prioritize collection efforts and focus on accounts most at risk of defaulting. For example, if a customer consistently pays late, it may be necessary to send reminders or follow up more frequently than with a customer who always pays on time.

Machine Learning (ML) is a branch of artificial intelligence that involves developing algorithms and models that enable computers to learn from data and make predictions or decisions without being explicitly programmed. In accounts receivable, machine learning is used to automate and optimize the remittance application process, the collections process, deduction validation, matching debits to credit memos, and cash forecasting.

Advanced accounts receivable management software often uses Machine Learning (ML) to analyze a wide range of data points, such as a customer’s payment history, credit score, industry, and geographic location. By combining this information with external data sources, such as economic indicators and market trends, ML algorithms can better predict a customer’s payment behavior. In addition, ML can automate many of the time-consuming and repetitive tasks involved in the AR collection process, such as sending reminders to customers, flagging overdue invoices, and prioritizing collection efforts.

6 Reasons to Use Machine Learning in AR Software

1. Predicting Payment Behavior: ML algorithms can analyze historical data on customer payment behavior to identify patterns and predict when and how much a customer is likely to pay. This can help collections teams prioritize their efforts and focus on customers most likely to pay.
2. Identifying High-Risk Accounts: ML algorithms can analyze a variety of factors, such as payment history, credit scores, and other financial data, to identify accounts that are at high risk of becoming delinquent. This can help collections teams proactively address potential issues before they become more serious.
3. Customizing Collection Strategies: ML algorithms can also be used to analyze customer data and identify the most effective collection strategies for each individual customer. For example, some customers may respond better to phone calls, while others prefer email or text messages.
4. Automating Collections Processes: ML algorithms can automate routine collection tasks, such as sending reminders or following up with customers. This can help collections teams be more efficient and effective while reducing the risk of human error.
5. Collection Agencies: Determining when to place a past-due debtor account with a third-party collection agency to maximize the chances of recovery. The natural tendency is to delay an agency placement decision and avoid recognizing a loss. Paradoxically, the result of decision avoidance and waiting too long is the bad debt they were trying to avoid. Consequently, companies can benefit from automating placement through ML or even some simple system rules concerning what to do when a receivable reaches X age.
6. Cash Forecasting: ML can improve financial operations by providing more accurate cash flow forecasting. Traditional AR software solutions typically rely on static assumptions about customer behavior and payment patterns, which can lead to inaccurate cash flow projections. ML algorithms can analyze historical payment data and identify trends and patterns that are likely to continue in the future. This can allow businesses to make more accurate cash flow projections and better plan for future expenses and investments.

Machine learning is a powerful tool for accounts receivable software because it can help collections teams make more informed decisions.

Using Natural Language Processing (NLP) in Accounts Receivable (AR) Software

An enhanced way that ML can improve the AR collection process is by using natural language processing (NLP) technology. NLP technology analyzes unstructured text data, such as emails, PDFs, and remittance backups, to extract meaningful insights.

In this context, NLP technology can analyze customer communications to identify issues preventing them from paying their invoices. For example, NLP algorithms can identify common complaints or issues that customers may be experiencing with the products or services provided. By addressing these issues, businesses can improve customer satisfaction and reduce the likelihood of late or missed payments.

Additionally, NLP technology can automate customer communications, such as sending payment reminders and follow-up emails. By automating these communications, businesses can reduce the time and effort required to follow up with customers manually.

In Summary

In conclusion, machine learning has the potential to revolutionize the way businesses manage their accounts receivable processes. By analyzing large amounts of data and identifying patterns and trends, ML algorithms can provide valuable insights into customer behavior, improve collections, and provide more accurate cash flow projections. As businesses continue to rely on technology to streamline their operations, machine learning in AR software will likely become increasingly common. Machine learning can potentially revolutionize B2B accounts receivable processes, including collections, dispute and deduction management, and invoice collections.

If you are in business, there will come a time when you need to enlist the services of a collection agency to help recover your past-due receivables and bad debts. So how do you find the right one?

Commercial debt usually involves significant amounts and often complex circumstances that can lead to financial issues for your business. If the money owed is business debt, Leib Solutions is a highly-rated expert who handles business-to-business bad debt collection.

What is Commercial Bad Debt?

Commercial or business, bad debt is the result of a company (the debtor) that buys services or products on credit terms but fails to pay what is due to the seller (the creditor). As a result, the creditor must then act by suing the debtor or assigning the account to a collection agency to avoid a loss. In the worst scenario, if the creditor does not take quick action, the creditor has to write off the sale as a bad debt. Usually, the two businesses have a binding written agreement, such as a contract or a purchase order.

Corporate Form and Owner Liability

Typically, business debts are the responsibility of the debtor corporate entity and not the liability of the entity’s owners. The corporate (corp. or inc.) and limited liability company (LLC) forms of organization are intended to protect the owners from the business’s debts. Limited partnerships (LPs) also offer protection, although the “general partner” of the LP may be liable for the LPs liabilities. In Partnerships and Sole Proprietorships, the partners or owners are generally personally responsible, so many business people shy away from these forms of organization.

Collateral and Personal Guaranty

When a corporation’s or LLC’s credit is insufficient, a creditor may request a personal guaranty or cross-corporate guarantees from affiliated companies, in which case those parties are also liable. In cases of long-term credit, the creditor will request collateral, such as property or equipment. Having collateral or a personal guaranty is a powerful inducement to pay.

What is Consumer Debt?

Consumer Debt is money owed by a natural person or persons. Consumer debt collectors usually deal with only one person – the debtor – and the debts are usually quite simple, unlike business debts, which can be much more complex. The collection of consumer debt is a very highly regulated activity. See FDCPA Below.

The Fair Debt Collection Practices Act [FDCPA]

The Fair Debt Collection Practices Act protects consumers from unscrupulous collectors looking to use any means possible to collect the debt and penalize those beyond established ethical guidelines. In addition to the FDCPA, many states have enacted versions mirroring the FDCPA, and others go far beyond with even more protection for consumers.

The FDCPA does not regulate Commercial collection agencies. The debt is still commercial if the agreement with your business customer also includes a personal guarantee. A commercial collection agency would be the appropriate entity to place this account for collection since they have special expertise in dealing with businesses and handling these complex matters.

Collection Agency Credentials

While most State and Municipal laws require licensing of consumer collection agencies for each state in which they operate, many State licenses for commercial collection agencies are reciprocal throughout the United States.

Professional commercial collection agencies also follow the ethical guidelines of trade organizations, including the International Association of Commercial Collectors, Inc. (IACC). Membership in the IACC requires compliance with high standards of practice.

Choosing the Best Commercial Debt Collection Agency

When choosing a commercial debt collection agency, you will be concerned about how long they have been in business, their capacity to act quickly and expertly to collect your money, as well as how professionally they deal with debtors since the agency is a reflection of your company.

You also want to ensure your receivables are given the most professional attention. Using an agency that only handles commercial accounts, and understands the types of disputes that occur in business transactions, will ensure the best results. Commercial collection specialization delivers better results for you.

Unlike consumer collections, the best commercial collection agencies are not “dialing for dollar” call center operations. Instead, they employ business and negotiation experts familiar with your business.

Comments on Collection Agency Fees

Never choose a collection agency because of the lowest collection rates, just as you wouldn’t choose a doctor on that criteria. It’s the expected net results -the amount of money you get back – that are important. A professional agency should always do its best, but keep in mind that the fee percentage they keep is their incentive.