Recovering debts is a critical aspect for the ongoing health of a business and higher debt recovery puts businesses in a stronger financial position. However, for some companies, especially those with tighter margins, effective debt collection is essential to ensure strong cash flow and even long term survival.

Many businesses are unaware that the way in which you select a debt collection agency and the terms under which you appoint them, influences the way you receive debt collection services. Businesses should opt for a selected tender process as opposed to an open tender process in order to receive better recovery rates.

Some businesses appoint a debt collection agency through an open tendering process, assuming that it is the most effective way to acquire a competitive deal. However, open tendering looks attractive on paper because of its low cost but can often result in lower resourced services and a low dollar recovery. There is a correlation between the amount of resources a company allocates to debt collection projects and the amount of money that can be recovered.

Some businesses also appoint debt collection agencies on a short term, contractual basis. Short term contracts, coupled with open tendering, can mix the issue and deter long term partnerships. Forming long term partnerships is essential for a business to obtain better recovery rates, as it encourages debt collectors to invest more and meet the standards set out by businesses.

Selected Tendering

Here are a few ways in which you can undertake an appointment process that will provide you with the best possible fit for your debt collection requirements:

1.      You should provide debt collection agencies with accurate information about the nature of the debts. These debts should be categorised by state, customer type, mean dollar and average dollar value etc. You should define the collection standards required, however, the collection process should be left to the discretion of the agency.

2.      You should pay collection agencies a commission for successfully recovering debts, while letting them bear the collection costs. Consulting with a group of debt collecting agencies will help you determine a rate that is sufficient for the nominated agency to allocated the necessary resources and carry out the recovery process. This will assist in determining a price for negotiation.

3.      A short list of around four to five debt collection agencies should be considered. These agencies should meet a certain criteria i.e. been operating for a minimum of ten years, sufficient business references and a solid track record. In addition, prior to making your decision, you should interview them and make a visit to their business premises.

4.      From the four to five suppliers, you should nominate two preferred suppliers and allocate each with half of the debt ledger. Usually, accounts are allocated for a period of 180 days, unless they are undergoing installment arrangements or legal action. At the end of the 180 days, both suppliers should return all accounts.

5.      At the end of the process, you should draw up a report that details and compares the performance of the two debt collection agencies. Both the agencies should be given the other agencies' report in order to encourage transparency and provide incentives for the underperforming agency to improve. The agency that performed better should be given a significant percentage of the accounts and the remaining accounts should be given to the underperformer, on the provision that it meets the standards of the other agency.

The selected tendering system is the best method a business can take in order to gather high dollar recovery rates. It provides significant incentives to the debt collection agencies involved and enables them to cooperate with businesses. It also ensures agencies continue to meet industry reporting requirements and operating standards. Most importantly, it facilitates debt collection agencies to continually improve their performance.