We asked three people from three distinct professions, ‘when should a receivable be outsourced for collection?’ and asked them to tell us the best recovery method,judicial or corporate,to employ in any given situation. First, we got the professional collection agency’s perspective. “There are many things you can do to avoid the need for us,” said Jeffrey Ellis, an independent Transworld Systems representative. “The most important is to have a really clearly defined collection policy as it relates to old or new invoices.” According to Ellis, educating customers about the details of collection policies can be done via invoices. “Of course companies put on their invoices ‘net 15 days; net 30 days, or even a cash discount for paying within five days,” he said. “Adding something about your collections policy is also a good idea.” Consistency is also important. “It is important to stick to your policy,” said Ellis. “You don’t want to have a wavering policy that can have a credit manager inadvertently overruling the owner of a business.” Such developments lead to bad outcomes, he added. “Ambiguity can drive a wedge between (sic) the credit manager, the controller, and the vice president of finance.” Furthermore, said Ellis, inconsistent policies lead to customers putting a company low in prioritization among their creditors. “Somebody has to get paid first; it might as well be you,” he said. Ellis believes accounts 40 to 60 days past due definitely belong in outside collections. “Of course there are no hard and fast rules,” Ellis said. “First you’ll impose a one-and-a-half percent late fee after 30 days in most cases, then when they start to get out past that 30 or 45-day mark, you send it to us or a traditional collection agency, some might prefer a lawyer.” Transworld works for a flat fee, rather than a percentage as is the case with most collection agencies. Ellis does recommend preserving customer relationships when to do so does not jeopardize a business and when there is an understandable cause for late payment. “But the key again is to make clear the policy, and the modified terms if you do give someone a break,” he said. “Most of our clients have at least a couple of hundred accounts and they know a certain percentage are always going to be late.” Transworld may charge $10 to $12 per “submission,” i.e., collection account, depending on the volume of submissions. Contingency-based agencies may charge anywhere from 10 to 30 percent, or even more. “The key is getting started in the collection process early,” Ellis said. “The older a receivable is, the less likely you will be paid.” Other Options A CPA’s viewpoint on the topic of collections is decidedly analytical. “If you keep it black and white, you’ll notice patterns with particular clients on your ledger and you’ll be able respond by getting more aggressive with this client or that client at a particular threshold,” said Sandy Kadekian, a partner at Grant Thornton in Woodland Hills. Some large accounting firms help their clients with keeping collections in-house or by referring them to trusted agencies to handle more difficult accounts. “It is true that the older a past-due account gets, the harder it is to get paid,” Kadekian said. “Getting help through your CPA can make your overall receivables picture easier to manage because you’re keeping a consistent system intact.” On the other hand, only an attorney can offer the gravitas needed to get some customers’ attention, said Carol Newman, a business litigation attorney in Woodland Hills. “Initially, phone calls are a good way to follow up,” Newman told the Business Journal. “But a business may also want to send something in writing,an e-mail or a letter.” But, said Newman, if there is no response, or an unsatisfactory one, such as no commitment to pay by a set date, getting an attorney involved is the best option. “If they are doing all that, and still not getting the desired result it is probably time to bring in some muscle.” Newman believes most customers desire to make good on their debts, but adds companies sometimes need help getting their customers’ attention. “A lawyer can write a (demand) letter,” she said. “Sometimes the customer will only become worried if they feel you will take it to the level of legal action.” According to Newman, it does not necessarily matter how serious her clients are about bringing suit on a collection account, if a letter demanding payment works. “I’ve had a couple instances where the company was having trouble getting a response from their customers,” she said. “In both cases, the letter got a response. And, in one, we got a settlement.” When a letter from lawyer is all that is needed to collect on an account, using an attorney generally saves companies, according to Newman. She estimates the billable time for such a letter to be about one hour, costing anywhere from $200 to $500. For smaller debts, then, it may not be worth it, Newman said. If a collectable debt is under $7,500, she recommends Small Claims Court. For debts greater than that, Limited Jurisdiction Superior Court is the venue for debt recovery. No lawyers are allowed to represent plaintiffs in Small Claims Court, while one is needed in Superior Court. “Still, if it’s under $25,000, it is definitely harder for it to be cost-effective to hire a lawyer,” Newman said. “Few attorneys are going to take a case on contingency if they know it will it will take $20,000 in attorney’s fees.” Asked what the downside to using a lawyer for collections would be, Newman answered “cost.” “But, only if it’s going to take more than a letter, and even then it’s going to be less than the 30, 40 and 50 percent some collection agencies charge,” she said. She also points out the likelihood that by the time a business is ready to bring in an attorney, they will probably be past the point of saving their customer relationship. Yet “It is realistic when someone is acting in good faith, and just may be unable to pay, to structure payments and try to keep them.” She strongly recommends using an attorney who specializes in business litigation and/or collections even then. “It is very important to be aggressive about collecting,” she said. “Especially now.”
