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Make your clients pay up
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July 21, 1998: 3:53 p.m. ET
Prepare your small business to collect -- if your customers stop paying
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NEW YORK (CNNfn) - Lots of awful things will happen if a bear market finally makes an appearance. People will lose money, the economy might suffer, consumer confidence could sink.
And if you own a small business, your customers might stop paying you.
Consider the facts: Americans are amazingly confident right now, especially while the economy is doing well, when jobs are plentiful and the stock is market plowing ahead.
As a result, people are carrying massive consumer debt and are become increasingly dependent on credit. But when consumers can no longer afford to pay the bills, somebody has to go extract their cash.
The Small Business Administration says credit reporting and collections will create more new jobs between 1994 and 2005 than any other small-business-dominated industry in the nation, with a projected increase of 68.4 percent.
And if a bear market rolls around, small businesses may be hiring more third-party agencies to collect payments from their clients than ever before.
"We have entered a new era of collections, focusing on professionalism and cooperation," says Gary Rippentrop, chief executive of the American Collectors Association.
The ACA offers the following tips for small businesses looking to hire a debt collecting agency:
- Find out what capabilities an agency has. Some capabilities may include skip tracing and forwarding abilities, electronic data transferring, billing and other additional services.
- Discuss recovery percentages and rates. Remember, the rate of commission is less important than the agency's percentage of return on accounts you place with an agency.
- Make sure the collection service has the skills and market knowledge needed to successfully collect on your particular type of accounts. For example, collectors working in medical collections must be familiar with medical terminology and insurance requirements.
- Investigate the procedures an agency uses to collect, and become familiar with the agency's policies and standards. A visit to the office can often be helpful.
- Determine if the agency holds membership in state or national trade associations such as ACA. Also make sure the agency complies with all state licensing and bonding laws, if applicable.
- Ask if employees receive training and certification. Although certification is voluntary, it indicates that the agency is responsible and recognizes the value of professional, competent employees.
- Ask for references. Try to contact at least two other credit grantors in your industry that are currently using the agency's services.
- Determine if the agency carries Errors and Omissions Liability (E&O) insurance. This insurance often extends coverage to the credit grantor as well, because a creditor client may face litigation as a result of alleged violations by their agency.
Since businesses need to cut their losses, the cost of bad debt is often deflected by raising consumer prices. The ACA estimates that every person in the United States pays an average of $375 more a year for goods and services as a result of bad debt.
And since there is a limit on how high prices can be increased before businesses begin losing customers, bad debt also results in business failures and job loss.
"Collectors are now being recognized for the important role they play in the economy," Rippentrop said. "They provide a valuable service to credit grantor businesses."
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