The Ideal Collection Alternative

Table of Contents Executive Summary 3 The Problem 5 Existing Approaches 7 Drawbacks 8 Recommended Solution 10 Case Study 12 Ideal Solution 14 Resources 16 2

Executive Summary Credit is the cornerstone of the U.S. economy. If you want to grow your business, you simply have to take the risk that your customer will pay for the goods or services that you provide. Sadly, regardless of the effort you make and the good work that you do, some customers fail to honor their responsibilities and you are left in the unfortunate role of becoming a creditor to your customer. When your obligation isn t paid, you are forced into a decision attempt to collect the debt, or take a loss and accept that you worked for free. For those creditors who chose to pursue collections, there are a variety of options available calls, letters and even litigation. When internal collection efforts fail, creditors again face another choice escalate their efforts and utilize a third party firm to assist them, or accept the bad debt as a cost of doing business and take the loss. For those who chose to escalate their collection effort, the options are very limited. 3

They can either assign the debt to a third party collection agency and pay a fee of up to 50% of the amount collected, or they can utilize a flat fee collection service which will allow them to maintain control over the process and keep all the money collected on their behalf. 4

The Problem In order to build a business, you have to take risk. One of the greatest risks is extending credit to your customers in order to make a sale. When you work for your customer and do not get paid, not only do you lose the profit that could have been made, but you then spend additional resources chasing the money you are rightfully owed. This adds insult to injury and forces many creditors to simply take the loss rather than pursue the matter and get paid the money they are owed. Most people think of creditors as banks or other traditional lending institutions that have the luxury of making a decision on whether or not to extend credit to an individual or a business after they have had the opportunity to review their credit, income, work history, general stability, etc. In reality, small businesses and individuals comprise the greatest percentage of creditors in the U.S. and they are at a distinct disadvantage. More often than not, small business owners do not become creditors by choice, but rather by necessity, when their customer decides not to honor the terms of their obligation after the services have been rendered. Doctors, ambulance companies, landlords, attorneys, plumbers, caterers, retail merchants, online merchants these are just a few 5

examples of the industry sectors that often become unwilling creditors when their customers receive their services, then fail to pay for them. Creditors act in good faith and customers become debtors, forcing the company to pursue a collections strategy. Once a company has extended credit, willingly or unwillingly, to their customer, and the customer has failed to pay for the services, the company is then forced to make a critical decision: collect the debt and risk upsetting their customer, or take the loss and write the debt off as uncollectable. Both options offer distinct challenges and risks and the decision is often based on the underlying relationship between the creditor and the debtor. Successful businesses make a business decision, not an emotional one, when it comes to collections. 6

Existing Approaches Internal Collections. For those creditors who elect to pursue collections against their client, the first course of action typically pursued is internal collections. Letters are often sent from the creditor to the debtor, informing them of the debt and requesting repayment. Letters escalate in tone and eventually might contain a threat of litigation, whether the threat is valid or not. Most creditors are limited to letters, calls, emails and other forms of contact requesting that their debtor honor their debt. The ultimate leverage they have is to take the debtor to court and attempt to secure a judgment against the debtor. Third Party Collections. When internal collections fail to produce the desired results, creditors are forced to make a decision: turn to an outside third party collection agency and risk their reputation, or accept the bad debt as a write off and get nothing. When forced into this unfortunate position, many creditors elect to pursue collections through an outside collection agency as they feel they have nothing left to lose. 7

Drawbacks Internal Collections. While many creditors view internal collections as the most logical and cost effective alternative, in reality, it is often the least effective and the most expensive option they can pursue. First, internal collections result in the employees of the creditor doing things that are outside of their core skills and often beyond their comfort zone. Employers want their employees to be doing what they are good at, at all times. For example, an office administrator in a small medical office is used to being friendly with the patients, helping them understand insurance issues, managing staff, etc. When the patient fails to pay the bill, that same person is now forced into the role of having to harass the patient to get them to pay the doctor s bill. It s an uncomfortable position for the staff member and one that takes time and energy away from the job that she is paid to do. Next, internal collection strategies are very limited in scope. Creditors can send letters and emails, and make phone calls. Unless they are a large institution, they have no way to credit report the debtor, which eliminates their greatest long-term collection leverage. In extreme circumstances, they may pursue a small claims lawsuit. All of these strategies cost time and money and none of them guarantee a result. Even a victory in court does not mean that the 8

debtor is going to pay the bill. There are thousands of uncollected judgments issued all across the United States every single day. Third Party Collections. If the creditor decides to outsource the collection effort, there are still many steps to take. First, they have to find a credible agency to work with. Then, they have to negotiate and execute an agreement. And finally, they need to provide the agency with all the proper documentation so that the agency can begin collection efforts. Then the waiting game begins. For some lucky creditors, they will get paid, in full, quickly. Most creditors, however, wait a prolonged period of time to collect whatever funds the agency is able to recover, less the fees paid to the agency. For most small creditors, the fees for collection services can run as high as fifty percent (50%). This fee structure creates further resentment as many creditors are forced to do more work, and wait more time, just to get a portion of the money they were originally due. 9

Recommended Solution The greatest collection advice is to structure your business where you never need to pursue your client for payment after the work has been done. For some creditors, that means requiring that their goods or services be paid for in advance. For others, it means that their goods or services be paid for at the time of delivery. For the vast majority of businesses, however, there is always going to be credit risk associated with their business. For those companies which are forced into taking credit risk, we recommend that they take basic precautions, in advance, so that if things fail to go as planned, they are protected. These steps include: 1. Know your customer. Gather good information prior to providing services, including name, address, phone numbers, email addresses, secondary contact information, date of birth and social security number (where appropriate). If the dollar amount justifies the effort, make the client fill out a credit application so that you have all their important information before the work is done. Remember, anyone who intends to pay you will gladly provide the information you are requesting. 10

If they are unwilling to share their information, you are getting a clear indication of a future problem. 2. Bill in a timely fashion. Many small businesses are so focused on working and getting the next customer, that they often fail to bill for the work they ve done in a timely manner. Get in the habit of doing the work, billing and getting paid in one sequence, not just in doing the work. There is never a reason to provide your customer with a free loan. 3. Have a proactive collection strategy in place. Determine acceptable timelines for payment, hold your clients accountable and have a plan in place for what you intend to do when someone fails to honor their commitments all before it happens. When it comes to collections - failing to plan is planning to fail! 11

Case Study A medical clinic in California was experiencing solid growth for more than a decade. A new management team, a renewed marketing strategy and dedicated staff had allowed the group to expand and serve more patients. Along with that expansion came a growing amount of uncollected fees due from patients. As the bad debt grew, the management team continued to focus on their mission: expanding the business. Eventually, this $12MM/year in annual revenue business realized they had amassed nearly $2MM in bad debt. A careful review of their issue led to the realization of several key findings: 1. The Group s internal collections efforts were always the collateral responsibility of a team member, never the focus of anyone in particular. As such, no one person was responsible for the results and the team kept passing the buck. The internal collections effort was also spotty and inconsistent, which further complicated the problem. Insurance billing was often delayed. Patient follow up letters and calls often took weeks and months to complete. Management was focused on top line growth, not bottom line results. While they hoped that their patients would pay the bill, they were not actively requiring them to. The problem just kept getting bigger each month. 12

2. The group had no external collection strategy in place. Every month, the bad debt grew no matter how much effort the team put into creating positive results. Bad debt became a source of negativity within the group and many team members decided there was no way to fix the problem, so they just tried to insulate themselves from it. Running away from the problem only exacerbated it. 3. Eventually, the group decided to rely on an outside collection agency which promptly started mailing and calling their delinquent patients. However, while the collection agency acted within the law, many patients were offended that they were sent to a collection agency and the medical clinic s reputation and patient goodwill suffered damage. Management was soon reconsidering all collection efforts as they realized the financial impact of the negative goodwill. The medical clinic faced a critical decision. Their internal efforts were inadequate. Their existing collection agency didn t know how to collect the debt without jeopardizing their patient goodwill. The clinic wanted to continue to grow, but was now cash constrained due to the ever-expanding accounts receivable. They needed to find another solution that would allow them to recover their money and retain their reputation. 13

Ideal Solution The medical clinic faced the same situation faced by thousands of other creditors every single day. They needed to recover their bad debt, but they didn t want to suffer any damage in doing so. For this group, and many others, flat fee collection services were the perfect solution. Flat fee collection services allow you to benefit from all the advantages of using a collection agency with virtually none of the risk. You get the leverage of the collection agency without having them contact your clients or accept your payments. Flat fee collection services allow the creditor to remain in control. For a nominal fee, a creditor can submit its account electronically to the service provider. The service provider generates the collection letters, and if the bill is not paid promptly, the account will be placed on the debtor s credit bureau report where it will stay for up to seven years (from the date of delinquency). The debtor is directed to contact the creditor to make payment arrangements. The flat fee collection service never takes a payment, never touches the creditor s money, never owns your account, and never accepts any settlement requests. 14

The creditor maintains complete control at all times. And, best of all, the flat fee collection agency collects no fee once the debtor pays the creditor. The creditor retains 100% of the proceeds! For those considering flat fee solutions, be sure the service is supported by a reputable collection agency that will allow you to assign any account that refuses to pay under a flat fee scenario to a contingency account for the agency. Sadly, with some debtors, additional work may be required, but most contingency firms that offer flat fee services will provide the contingency work at a discount to their client. Remember, top line growth matters, but bottom line growth ensures your survival! 15

Resources Flat Fee Service Providers OldDebts.com OldDebts.com allows you to send a series of customized time-tested debt collection letters to your debtor and report them to the major credit bureaus (Experian, Equifax, and TransUnion). All money collected is paid directly to you without going through any middleman -- there is never any contingency fee. This means you keep 100% of all money collected! RentRecoveryService.com - Rent Recovery Service allows a property owner to immediately report a delinquent tenant to the credit bureaus and order a series of collection letters be sent by a licensed collection agency Full Service Collection Agencies FCSCollect.com - Fidelity Creditor Service, Inc. is a full service collection agency, capable of handling an account at any stage in the collection cycle. They specialize in Healthcare, Financial Institutions, Municipal and Property Management accounts. Copyright 2014 Fidelity Creditor Service, Inc. All Rights Reserved 16