Bad debts affect small businesses more than large businesses. Large businesses have the buffer to survive bad debts while small businesses do not. If small businesses do not get payments on time, they cannot reinvest in the business for lack of funds and have to stop operations. Many small businesses have actually shut down because of their inability to recover bad debts.

Why is it difficult for small businesses to collect bad debts?

Some of the factors that make collecting debt especially difficult for small businesses are described below:

Avoiding unpleasantness: Collecting debt is an unpleasant task. As the business is small, its focus is on getting more business and retaining existing customers. Despite the fact that customers are in the wrong in delaying payments, the business will not remind them of the dues too often for fear of losing further business. Customers understand the predicament of small businesses and take advantage of it.

Short of resources: Small businesses do not have the resources to recover bad debts. Collecting debt requires keeping accurate records of debt and credit transactions, sending out reminder letters regularly, calling up customers, visiting customers and regular follow up. This needs time, manpower and money. Small businesses are short of all three.

Using in-house staff to collect debt: Small businesses try to save money by recovering bad debts themselves. The business gives the responsibility of debt collection to an Accounts Receivables person. This is not very effective and rarely results in quick debt recovery.

Firstly, the Accounts personnel are already swamped with work, and cannot put in the required time and effort to collect debt. Secondly, debt collection is a delicate task that needs to be handled with finesse. Accounts personnel can in fact spoil your customer relationships by being tactless. Thirdly, in-house personnel may not be aware of the state and federal laws regulating debt collection. Violation of these laws will cost your business more by landing you in legal trouble.

How does a collection agency help small businesses?

Collection agencies can help small businesses improve their bottom line considerably. Many collection agencies deal with small business accounts, and charge accordingly. The fact that you have partnered with a collection agency will make customers take you more seriously.

Collection agencies have skilled staff trained in debt collection strategies. They are well-versed in debt collection laws and have a professional and cordial approach towards customers. The collection agencies will charge a fixed rate or a percentage of the debt they collect. They have greater incentive to recover debt faster.

Collection agencies collect debts through a four-phase process. The process involves sending out demand letters to the customer, contacting customer through phone, reporting customer to a credit rating bureau and filing a lawsuit in case of non-payment.

The demand letters or notices sent out by the collection agency give details of the debt, the amount due and a payment due date. The third and last demand letter warns the customer of being reported to a credit rating bureau if the payment is not settled by the specified due date. The warning will push most customers into settling their dues as a report to credit rating bureaus will hurt their creditworthiness.

Collection agencies fall cheaper in the longer run, as they recover the bad debts you would otherwise write off. Collection agencies will recover your debts in a professional manner, thereby enhancing your customer relationships. With a collection agency as your partner, you can focus on your business operations without worrying about funds.

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Debt collection is the act of obtaining payment from customers for credit-made purchases. It is a thoroughly cumbersome process for most businesses, thus an efficient and effective system of overdue accounts collection must be a major priority - especially by small businesses.

For many small business operators, debt collection is the most unpleasant task of all - keeping tabs on overdue accounts can be very complicated, and pressing people over financial matters is not particularly enjoyable. But more than the large businesses, it is the small ones that must establish appropriate collection systems - else, the company itself is endangered financially.

Simply out of ignorance, small businesses write off great losses because they do not realize that collection agencies can be economical in the long run. Hiring collection agencies - instead of simply relying on the accounts receivable clerk to act as a collector - will not only save time but finances also. Bad debts - money owed that appear impossible to collect - are a collection agencies target.

Small businesses have also this mindset that only large businesses can afford collection agencies. A business must have growth in mind, and taking steps the way your larger competitors do is one of the first steps for that. Plus, most of today's collection agencies are small business friendly. The mere fact that you have employed the services of a collection agency improves your company bottom line significantly.

Search for a collection agency offering various collection amount levels. One reason why small businesses do not employ collection agencies is because of the notion that the debt owed to the business is trivial to large collection agencies. No debt is too trivial, especially when it is a bad debt.

Make sure that a particular collection agency works within the law.

The debtor must not be unduly harassed with late night or early morning phone calls, or your business will be assaulted with lawsuits. Collection agencies must comply with strict laws, and must be one to use brains more than brawn. Four strategies are mostly used in debt collection - letters, direct contact through telephone, notification to credit reporting bureaus, and litigation.

Collection begins with a series of three notification letters sent to the debtor, most often called demand letters. The third letter is a warning to the debtor - if the outstanding debt remains unpaid on a certain day, the debtor's name or company will be reported to one or all of the big credit-reporting bureaus.

This warning often prompts immediate action, as unpaid debts on a credit report are a blemish on one's financial reputation. Reports of unpaid debts may, after all, lead to a denial of credit in the future. When all else has failed, litigation is employed as the last resort.

Small businesses operate on a much tighter budget, and a delinquent account or two can halt the growth of the business. Collection agencies are more needed to ensure the growth of the company. Tracking down debtors is frustrating and tedious - for the collection agencies, it is what they do best.

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