Running a business is difficult enough when every customer pays on time. When customers don’t pay though, they create additional problems. As a business owner, you probably know all too well what unpaid invoices do to your bottom line. Perhaps you’ve wondered whether you should sell your bad debts to a collection agency.
Collection agencies usually enter the picture after a company has tried unsuccessfully to collect on bad debt for a certain amount of time. Maybe it’s 90 days. Perhaps you’ve waited 5 or 6 months. Either way, you are thinking of turning to a collection agency because you cannot seem to make any headway. Just be careful about what you agree to. There are different ways to handle bad debts when collection agencies get involved.
Two Basic Models
Collection agencies work on one of two basic models. The first model is the purchase model. This is a scenario in which a collection agency purchases bad debt from a creditor. Under the law, debts are assets that can be freely bought and sold. Once a collection agency purchases a bad debt, it becomes the legal owner of that debt.
The other model is the contingency model. It is similar to the legal industry’s contingency model. Rather than purchasing bad debt, the collection agency agrees to pursue collection on behalf of the client. The agency is only paid if and when it succeeds.
Selling Means Being Done with It
Selling bad debt to a collection agency can seem pretty attractive if a creditor just wants to be done with it. A company might spend more than 6 months pursuing deadbeats to no avail. The accounts receivable department is just tired of the ongoing hassle. Company owners are tired of having unhappy receivables team members. Selling solves the problem all the way around.
When you sell debt to a collection agency, you are selling everything that goes with it. The debts are no longer yours to worry about. They are off your books. You and your bookkeeping team can go about your business and never have to worry about the deadbeats again. At least until new deadbeats come along.
Going the contingency route still takes all the hassle out of collection, but there is no guarantee you will actually get paid. So in addition to losing all that time you invested, you stand a chance of losing the total amount you are due.
Contingency Means Getting More
The contingency model does have its advantages. The biggest one is the potential for getting more money in the end. Contingency acts as an incentive to the collection agency to get as much as possible as quickly as possible. Why? Because contingency operators generally charge a percentage of what they collect. The more they collect, the more they earn.
The judgment collection specialists at Judgment Collectors says that the contingency model also provides serious motivation to succeed. Judgment Collectors is a contingency-based agency specializing in judgments. They do not want to put in the time and effort only to come up empty. They have every incentive to do the best job possible.
Selling debts to a collection agency generally means accepting less. Collection agencies do not pay full price on unpaid debt. They pay substantially less. Sometimes what they offer is too little to make selling worthwhile. So that needs to be considered.
Should you sell your bad debts to a collection agency? There is no right or wrong choice. Investigate both selling and contingency debt collection. Compare the advantages and disadvantages of both and then make a decision from there.