Increase in accounts receivable collections placements reduces profit margins and increases expenses for U.S. businesses. Find out how to reduce the negative impact slow paying customers and bad debt has on your organization.
Accounts Receivable Collections Placements Cut Profit Margins Dramatically
While not completely unexpected, 2015 fourth quarter collections placements rose by 32.4 percent over the previous quarter. This increase in accounts receivable collections placements was accompanied by a 6.5 percent increase in average dollar amount, bringing the average-sized account placed for collection to more than $3,000.
Collection agency fees vary widely, but most are based on a percentage of the amount of the account placed and tiered by amount. The Kaplan Group, a collections agency which provides quotes from multiple agencies, shows sample rates tiered by the amount placed which range from as little as 10 percent of an account over $500,000 to as high as 50 percent of an account placed for collection under $1,000.
On a tiered collections fee scale, if your company needs to place a $10,000 account for collection, the cost would be about 20 percent or $2,000. Depending on your profit margin, this type of fee could significantly reduce or even eliminate your profits, which is why placing accounts for collections is often a last resort.
However, postponing placement also decreases the likelihood of collecting on the account and therefore increases the cost, since more effort is usually required to collect the money owed. For instance, a collection agency might charge a 25 percent fee to collect on an account that is 90-180 days old, but may charge as much as 50 percent of the amount placed to collect on an account more than 24 months past due.
3 Tips for Speeding Up Collection on Accounts Receivable Invoices
Cash flow is the lifeblood of any business. When customers delay or default on payments it can limit your ability to maintain growth momentum, take on new business or even meet expenses. Here are three tips that can help you improve your chances of getting paid, on time:
1. Factor Accounts Receivable Invoices
You can reduce your risk and lower costs associated with late customer payments and bad debts by factoring invoices instead of waiting for customers to pay. While a factoring company is not a collection agency, they can play a vital role in helping your business establish credit limits for your customers and even let you know of potential non-paying customers before you choose to work with them.
Collection agency rates typically range from 10 to 50 percent of the amount placed for collections, while your business also experiences a delay of many months between the time of sale and the time your business gets paid — all of which can negatively impact your ability to do business and grow.
You can reduce or even eliminate your company’s risk from bad debt by factoring accounts receivable invoices with a non-recourse factoring company and get paid on the same day your company generates a customer invoice. When you factor accounts receivable invoices, you may enjoy several benefits, including:
- Non-recourse factoring – the factoring company assumes the credit risk on factored invoices, not you
- Fast same / next day funding – you get paid on the same day a customer invoice is generated
- Advances up to 98% of the invoice amount
- Low fees starting at 1%
- No long term contracts
- No cost or obligation to apply
- No hidden fees that drive the cost of factoring up
- No factoring minimums – you are free to factor when it’s in the best interest of your company
- Free credit checks on your customers to help you pre-screen new customers more effectively
2. Vet Customers More Carefully
The more thorough your new customer screening, the more likely you are to identify customers that represent a bad risk. You can do this by checking customer credit, asking for references, and establishing manageable credit limits for each new customer based on risk that can be adjusted upward (or lowered) based on how quickly they remit payments to you in the future.
Some factoring companies provide their factoring clients with free credit checks on their customers (whether they factor the customer’s invoices or not). This can help you feel confident in the credit-worthiness of new customers or identify potential problems before they result in customer’s defaulting on payments.
3. Incentivize Early Payment
Extending early-pay discounts is a common tactic used to speed up collection on accounts receivable invoices. To induce a customer to pay more quickly, early-pay discounts may need to be sizeable in order to make paying early attractive to your customers. By contrast, it’s very likely that the fee to factor an invoice would be lower than the percentage of discount extended for early payment. In addition, some customers, such as large companies, may not be incentivized to pay early in exchange for a discount and may even require you to give them payment terms of 60 or 90 days – or even longer. For that reason, you might even want to use a combination of early pay discounts and invoice factoring to get the fastest, most profitable turnaround on accounts receivables.
No business owner wants to see their profits diminished by slow-paying customers or bad debt write-offs. Make sure you have a plan for vetting new customers and periodically re-assessing your risk as well as speeding up customer payments using incentives, faster payment terms and invoice factoring to protect the bottom line of your business.
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