Most business owners who invoice customers for goods or services will encounter the occasional late payment. However, if a customer’s invoice due date has come and gone and you can’t get a firm answer on their payment status, it might be time to consider using a collection agency.
These agencies exist to collect payments that are owed to your business on your behalf. Collection agencies typically take a fee in the form of a percentage of your customer’s invoice, and depending on the company you hire, you may not even have to pay for debt collection services unless a payment is successfully collected. But how do you know it’s time to take this step with a nonpaying customer?
Here’s what a collection agency does and how to determine if you need to hire one to receive an overdue invoice payment.
[Read more: What to Do if Your Customers Don’t Pay]
How do collection agencies work?
Collection agencies attempt to collect past-due payments from clients on behalf of a business in exchange for a portion of the original invoice amount. Typically, companies can hire a collection agency once an invoice is several months overdue, typically at least 90 days.
Collection agencies use a variety of methods to contact the customer directly in an attempt to obtain payment, including written notices, phone calls, and even in-person visits to the customer’s address. Many collection agencies also have access to databases that help locate debtors who have left town to avoid paying their invoices.
When you hire a collection agency, they’ll work with you to develop a plan to reach your nonpaying customers. You’ll likely receive a dedicated point of contact who will keep you updated throughout the process while they work to collect your unpaid invoices.
[Read more: 8 Ways Your Business Can Find New Customers]
A collection agency can function as a neutral third party that coordinates payment with your customer.
Signs you may need to use a collection agency
If you have experienced any of these situations with a customer’s invoice, a collection agency may be able to step in and help you get the money you’re owed.
- You can’t reach the customer. When a customer misses their payment deadline, your first action should be reaching out to them via email or phone. If you are unable to reach them after multiple attempts, it’s possible the customer is ignoring your communications to avoid paying their invoice.
- A payment is over 90 days past due. If you have invoices that are more than three months overdue, it may be time to hire a collection agency. While the agency has a lower chance of collecting the funds after this amount of time, they are specifically trained to handle these types of situations and may at least be able to settle with the customer for partial payment.
- The customer’s payment methods keep failing. Multiple bounced checks or failed online payments could be a sign that your customer does not intend to pay what they owe you.
- Your customer gives excuses for nonpayment or asks for special treatment. A customer who hasn’t paid their invoice may cite financial issues or other factors as a reason for their nonpayment and ask you for extended terms or payment deferral or cancellation. This can be a tricky situation to navigate, especially if you have a good working relationship. A collection agency can function as a neutral third party that coordinates payment with your customer while your direct professional relationship with them remains strong.
- Your cash flow is suffering. Late payments can impact your cash flow and slow down your entire business operation. Some collection agencies offer an invoice purchasing option that can get you the cash you need while they work to collect from your customer.
The decision to work with a collection agency is not an easy one, as there are financial and reputational risks involved for you as the business owner. You may view a debt collection service as a final option if all other attempts to collect payment have failed.
If you do decide to use a collection agency, thoroughly research your potential service provider to understand their cost structure, collection methods, and credentials before you hire them to interact with your customers.
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