10 Tips for Startups Using a Debt Collection Agency
Originally published in Under30CEO.
What advice would you give an entrepreneur thinking about using a debt collection agency for the first time?
The following answers are provided by the Young Entrepreneur Council (YEC), an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, the YEC recently launched #StartupLab, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses via live video chats, an expert content library and email lessons.
1. Collect Phone Numbers
Debt collection is one of the hardest jobs any entrepreneur faces. It doesn’t matter how great your product is if you cannot get people to pay you on time. Nothing will sink you faster than a negative cash cycle (aka “Reverse Groupon” problem). Collect a phone number from every customer so you know who to call in case they forget to pay.
– Sunil Rajaraman, Scripted.com
2. Understand the Costs
Before using a debt collection agency, make sure you understand all the costs associated with it — both the financial costs and any cost to your customer relations. Think through the ROI to make sure it’s worth it before you go down that road.
– David Ehrenberg, Early Growth Financial Services
3. Check Reputations
Any debt collection agency you use will be able to impact your reputation. If there’s even the slightest problem, such as contacting the wrong person, it’s your company’s reputation that will take the hit — not theirs. Only work with companies that have established impeccable reputations of their own.
– Thursday Bram, Hyper Modern Consulting
4. Ask “Why Am I Doing This?”
As a lawyer, I dealt with upset business owners who wanted to get paid and entered litigation to do it. In the long run, they often hurt their brands by doing so. Debt collection agencies can do that, too, so before you hire one, think, “Is it really something I cannot live without?” And if you can live without it, then refocus that energy on your business.
– Benish Shah, Vicaire Ny
5. Try Working It Out First
Do everything you can to work things out amicably with the non-paying client before going to a debt collection agency. The return that you will get from a debt collection agency is usually minimal.
– John Hall, Digital Talent Agents
6. Do It Now!
Do it now! If you have people who owe you money and you need to collect, it will only be harder the longer you wait. Make sure they only charge when they collect, and that you don’t have to pay upfront. Also, review the process they use (email first, then letter, then call, etc.).
– Jordan Guernsey, Molding Box
7. Understand the Intimidation Factor
It is good to understand that a large chunk goes to the debt collection company. A collection company typically doesn’t really sue anyone; they intimidate. If it’s a large sum of money, talk to a lawyer first and check out your options.
– Joe Martin, Merchandize Liquidators
8. FedEx a Demand Notice Before You Hire
Collection agencies charge hefty fees and should only be used as a last resort. A lot of payment issues could be resolved by a simple phone call, or if those go ignored, then send a letter via FedEx with signature confirmation, or perhaps a “draft” Small Claims Court Filing. In the past, I’ve also had good success escalating payment issues to the company CEO, even at publicly listed companies.
– Matt Mickiewicz, Flippa and 99designs
9. Go to Small Claims Court First
Before you go to a collection agency, make sure you have a strong legal ground to support your case. Bringing in a debt collection agency without clear legal backing can be risky. Make sure that you actually have a claim on the money before you bring in any third party!
– Aaron Schwartz, Modify Watches
10. Find an Agency That “Gets” Your Industry
Many collection agencies are generalists. Find a collection agency that “gets” your industry and how your customers’ buying cycle operates. Agencies that understand your industry and its customers will know how to legally hunt down deadbeats who don’t pay you.
– Jason Duff, COMSTOR Outdoor
Are you using a debt collection agency, or planning on using one? Tell us about it in comments below.