The 6 Hidden Costs of Debt Collection for Businesses
Debt collection is a necessary evil for many businesses. When customers or clients fail to pay their bills, businesses often turn to debt collectors to recover the owed amount. However, while debt collection might seem like a straightforward solution, it can come with significant costs that many businesses might not anticipate. Let's delve into the expenses associated with hiring debt collectors and why they might be more costly than businesses initially think.
1. The cost of getting to the point of needing a debt collector
The cheapest customers for any company are those that pay on time and use digital self-servicing tools. The other extreme however is customers that can’t pay and need multiple attempts of outreach engage the customer, keep talking to them and get payment from them. The problem with this expense is the impact on margin’s across the business, and the seeming inability to meaningfully change the volumes of customers getting into hardship, other than begging customers to get in contact earlier.
2. Direct Costs of Debt Collection Services
The most apparent cost of debt collection is the fee charged by the collection agency or lawyer. According to business.gov.au, the costs associated with debt collection can vary widely based on the complexity of the case and the amount of debt to be recovered.
Furthermore, data from JMA Credit Control, a debt collection company, acknowledges businesses might end up paying 5% to 50% of the collected amount, depending on the age of the debt. Older debts, which are harder to collect, often come with higher fees - and this is on top of the operational expenses the service provider has already incurred before getting to debt collection.
Bark.com provides a more detailed breakdown of the costs. On average, debt recovery lawyers charge between $160 and $450 per hour. If the debt recovery process is prolonged, these hourly rates can quickly add up. Additionally, the method of recovery chosen (debt collection agency vs. debt collection lawyer) can significantly impact costs. For instance, sending out letters of demand might cost between $70 and $120, while winding up proceedings can range from $440 to $3,700.
2. Indirect Costs and Lost Opportunities
Beyond the direct fees, there are indirect costs associated with debt collection. For instance, the time and resources spent on managing the debt collection process can divert attention from core business activities. This lost time can result in missed opportunities and reduced productivity.
3. Potential Damage to Customer Relationships
Engaging in aggressive debt collection practices can strain relationships with customers. Even if the debt is recovered, the business might lose a customer for life. This loss can be particularly damaging if the customer was previously loyal and had the potential for future transactions.
4. Legal Implications
If not handled correctly, debt collection can lead to legal complications. Businesses need to ensure that they adhere to all regulations and laws related to debt collection. Any missteps can result in lawsuits, fines, and a tarnished reputation.
5. Uncertainty of Debt Recovery
Even after incurring the costs of hiring a debt collector, there's no guarantee that the debt will be recovered. According to JMA Credit Control, the success rate of debt collection decreases as the debt ages. This uncertainty means that businesses might end up paying for debt collection services without any return on investment.
6. Brand risk
Using debt collectors is a cost many businesses want to avoid not just for all the immediate commercial challenges listed above, but also because of the reputational risk issues of the customer, and the people around them, who may now think quite negatively about the company, depending on how aggressively their friend is being hounded by a debt collection company.
While debt collection is often used by companies, needing them should be seen for what it is – largely a failure of internal processes to properly help customers before reaching that point.
It's essential to weigh the potential recovery against the expenses and risks involved. In some cases, it might be more cost-effective to write off the debt or explore alternative methods of recovery. Before engaging a debt collector, businesses should do their due diligence, understand the potential costs, and consider the long-term implications for their operations and customer relationships.
Helppay is a 100% Australian owned and operated company that partners with service organisations in complex and highly regulated industries to improve cash flow, reduce customer debt and enhance companies social standing by removing debt from the communities they serve..
HelpPay's B2C app makes getting and giving help easy and trusted and Helppay's B2B platform and API enables businesses to offer a debt prevention service and track performance in conjunction with existing customer soltutions and billing programs.