The pros and cons of different debt collection methods

No matter the size of your business, your organization will always encounter consumers that have challenges meeting their financial obligations. For a whole host of reasons, consumers can either be late in paying you, or stop paying your business altogether.

We always advise the organizations we work with to have an internal debt collection strategy prior to issuing accounts to a collection agency. That allows your business to conduct due diligence in trying to resolve the matter internally.

There are many ways to get your customers to pay before handing that account over to your debt collection agency. And there are benefits to doing so but there are also some issues to keep in mind.

Check out our pros and cons of various methods of debt collection.

Follow up collection calls from you or your staff

We always advise a business of any size to conduct follow-up calls on past-due invoices. A tactful and respectful phone call from your organization serves as a direct connection between you and your customer. If you can start a conversation with your customer, you may be able to identify the reasons why your bill has not been paid. That can include financial difficulties or a concern regarding the service your customer was provided. Your staff can find out if the customer is satisfied with what they received from your organization and if not, begin the process of correcting that issue.

The cons: follow-up calls are necessary in debt collections but when they are not achieving the results you need, they begin to get time-consuming for you and your staff.

E-mail and text reminders for overdue invoices

E-mail and even text messaging is becoming more and more accepted as a method to collect overdue payments from your customers. As more people communicate through these methods and less people pick up their phone, emailing and texting customers to remind them of a past due payment or other reasons is becoming more effective. Depending on the platforms you use, these can be less time-consuming for your staff and even automated. You can even provide a direct link for easy payment.

The cons: As you might imagine, it can be very easy for a consumer to ignore e-mail and text messages. They can not only delete them but also block these communications. You’ll also need to familiarize yourself with the legality of communicating through e-mail and text.

Payment plans to get your customers back on track

Payment plans can be a great tool in allowing your customers to catch up on their financial obligations to your organization. If your business can be flexible, you can work with your customer to dictate an installment plan. This shows that you value the relationship you have built with them and can be diplomatic during challenging times. Payment plans also give your business much-needed cash flow instead of getting nothing.

The cons: unless enforced in writing, in some cases consumers may not keep up their end of the agreement. Your customer may default unless you have prior authorization such as a credit card. And of course, it will take longer to collect the full balance.

Small claims court

In many situations, going to small claims court may be another option. Such as a onetime debt from a client. Winning a judgment in small claims court provides you with a legal document that states your client owes you money and it is recognized by the court. In most states there is a very affordable filing fee and you will not have to retain the services of an attorney which could dig into your profits. Small claims court could be an alternative if you do not have an ongoing need for debt collections.

The cons: small claims court may win you a judgment but it is up to you to enforce it. Yes, it is a legal decision from a court of law but oftentimes, businesses find it challenging to have judgments upheld. Going to court can also be time-consuming and there are no guarantees your business will win that judgement.

Hiring a debt collection agency ups your chances of getting paid

There are also pros and cons of hiring a debt collection agency but doing so provides you the best chance for getting your customers to meet their financial obligations and improve your cash flow. Working with a collection agency can help you preserve internal resources such as those time-consuming follow-up calls.

A collection agency will also be focused on compliance and will go to great lengths to follow the law, whether federal, state or local regulations. That includes all communications including phone calls and possible use of e-mail and text messages.

Negotiating a payment plan with your customers can be time-consuming and that’s where a debt collection agency can provide tremendous value to your organization. They can spend the time working with your customer and develop a plan to get you paid back.

A collection agency also creates urgency and oftentimes you get paid much faster when a professional debt collector communicates with your customer. Urgency equals cash flow.

A professional debt collector can also help preserve the relationship you have built with a customer by mediating a financial dispute.

The cons: There will be some instances where your customers are offended about being sent into collections. While oftentimes customers go back to patronizing a business after collection activity, there will be cases where your clients will go elsewhere. That’s why it’s important to reinforce your payment policies and expectations right up front with customers.

Whatever the pros and cons are, remember that you are owed this money and it is your right to pursue collection activity.