The odds of collecting a bad debt

Often potential clients who are shopping for a collection agency ask what the odds are of collecting a delinquent receivable, or debt. The reality is there are numerous elements that determine your odds of collecting a bad debt. Every industry, company and debtor have unique economic circumstances. This is why some Clients have a recovery rate in the 90%+ range and Clients where it is in the 30% range. There are three main factors that determine the odds of a third-party collection agency collecting your receivable, or delinquent debt.

Time is the biggest enemy when it comes to debt collection. Procrastination can dent, or demolish your bottom line. Companies often realize they have a problem receivable within a few months. They either put the receivable on the back burner, or follow up with notices and calls until the debtor puts them on permanent ignore. Meanwhile, months have passed and a lot can happen to a debtor company including going out of business.

Some companies think they are saving money on collection fees, only to write off a huge amount when their efforts fail. Instead of a percentage of something, they end up getting 100% of nothing.

The saddest scenario we come across is Clients who have allowed a large balance receivable to go past two years. In most provinces there is a two-year statute on being able to sue a company for debt. Pro debtors are well aware of these statutes and know they are immune from legal action. By this time their credit rating is a disaster and they couldn?t care less if you report them to the credit bureaus.

A proper credit agreement dramatically increases your odds of collection. If the debtor is a limited company, do you have a personal guarantee from one or more of the principals? Were the debtor companies screened before being granted a line of credit? Companies that extend credit without an agreement or credit screening are probably sitting with a stack of credit customers who shouldn?t have been granted credit in the first place. It is just a matter of time until these debtor companies default on their payments.

Disputes happen. Most disputes can be resolved amicably. However, sometimes both parties reach a Mexican standoff. Neither side is willing to negotiate any further and the debtor is using the dispute to justify not paying. Some of these disputes fester with time and both parties dig in their heels, which results in expensive litigation.

A third party like a collection agency can boost your odds of recovery. A collection agency can often objectively cut through the animosity of both parties and negotiate a solution that is acceptable to both sides, without expensive litigation.

The points listed above are just a few of the elements that affect the ability to recover a debt in a fast, effective manner.