When A Business Should Use A Collection Agency: Part 1

Hi,
There are many different reasons why all kinds of businesses hesitate to utilize collection agencies. Over the next couple of days I am going to discuss some of the fears and misgivings companies have about whether or not to turn their accounts receivables over to collection agencies. One of the most common fears businesses have is that it will hurt their public image. Businesses provide goods and services, expecting to be paid. When customers don't pay, pursuing payment is a normal course of business action. Another common fear is that collection agencies operate outside the law and without professionalism. The best way to alleviate this fear is to go to the collection agency and become comfortable with the people and surroundings. The last major objection businesses have in turning their accounts over to collection agencies is the cost which is almost always on a contingency basis, ranging from 10%-50% of the amount owed. This objection is understandable. However 50%-75% of something is better than 100% of nothing. Large corporations generally have an intermediary step in the collection process, as they have an in-house collections department. Statistically, by the time an account goes through the collection process from the credit department to the collections department, the company's chance of successfully recovering payment on that account is almost nil. As I've referred to in previous blogs, many large companies have gotten away from professional collectors and replaced them with customer service people who have only a generic menu available to resolve accounts. Three major reasons a large corporation should send an account to a collection agency:
1) The account will be serviced by a person skilled in the collection process, and who specializes in the field of difficult collections.
2) If accounts need to be litigated, they can be assigned to the collection agency and therefore sued under the collection agency's name. This helps to preserve the corporation's public image.
3) Sending accounts to collection agencies allows companies a partial recovery on accounts which would otherwise be charged off.
These are just some of the reasons companies should take advantage of utilizing collection agencies. Due to the generic approach large companies are taking in regards to collections, the personal touch used by collection agencies may make the difference in the successful resolution of past due accounts. Tomorrow I will talk about the benefit of collection agencies for small businesses.
Until then,
Alan

The Evolution of the Credit Department: Part 3

Hi,
In the last two blogs I have discussed how many credit departments have adopted a generic approach in how they decide to extend credit. I have also discussed the pressure sales people exert on credit departments to approve their credit requests. Now I want to examine some of the other pitfalls in eliminating the hands-on approach in extending credit:
1) Validating information on a credit application is more accurately done by people than machines.
2) Human involvement can identify when past credit problems should not interfere with current credit decisions. A common example of this situation is when a couple is divorced and the responsibility for financial obligations was put on the back burner during the divorce process, but both people became good credit risks after the divorce.
3) Another common occurrence is that when credit applications are rejected due to erroneous credit information on the individual's credit report. Human reviews can catch and rectify that situation more efficiently than machines.
4) Human involvement allows loan structures to be modified to suit individual credit needs that machines are not programmed to recognize. The best example of this is farming operations and their unusual income streams.
Credit departments have transformed from experienced credit professionals familiar with their particular credit fields, to computerized departments staffed by customer service reps. This change has resulted in an increase in sales and overall profits for companies. But the change also brought an increase in the cost of collections due to inferior credit. This cost has been passed on to the consumer in higher interest rates, finance charges and late fees. Tomorrow I will begin to talk about collection departments, and the people responsible for cleaning up some of the problems created by the generic approach to credit extension.
Until then,
Alan

The Evolution of the Credit Department: Part 2

Hi,
The changes of staffing and structure in credit departments has been dramatic over the last thirty five years. In the past, it was a requirement for a lender to be familiar with the particular business to which they were granting credit. For example, if a lender was setting up a loan for a farmer to buy farm equipment, the lender understood the uneven income stream of each farmer and structured the credit to match it. The lender was also familiar enough with farming to differentiate between needs and wants in loan applications. It was also necessary for the lender to assess whether or not the income of the farm could service the additional debt. Today, in many instances, the credit people responsible for funding farms have no experience in farming and grant credit with a generic process rather than an individualized one. This sometimes results in farm loans that are doomed from the start which, in most cases, are doomed through no fault of the farmer. The other dynamic in a credit department is the relationship between the sales force and the credit staff. In many cases, sales people pressure credit departments to get approval for their customer's credit applications. As many sales people are paid primarily on commission and bonuses, their motivation is understandable. This sometimes results in loan approvals that are questionable at best. Tomorrow I'll talk about the balance needed between credit and sales departments for a successful company.
Until then,
Alan

The Evolution of the Credit Department

Hi,
Credit departments have changed dramatically over the last thirty five years. In the past, credit department employees checked and assessed all aspects of credit requests and dealt with each request on an individual basis. The result of this hands on approach was that credit was only extended to people who could genuinely afford it. As a result, the number of delinquencies, charge-offs and repossessions was very low. Due to the human verification process, it was rare that information on credit applications was falsified. Computer technology redefined how credit departments work and how credit is granted. By using computers to compile statistical data, creditors have established various formulas with which to generically grant credit. These actions have caused a multitude of problems in the credit field. It has allowed unscrupulous borrowers to obtain credit that they can ill afford and in some cases, have no intention to repay. One of the other negative effects of this generic approach to credit is that many times people unknowingly obtain more credit than they can afford to repay, and which in some instances results in financial chaos. To cover the cost of these indiscretions, the credit industry has used higher interests, finance charges, late fees, etc., Tomorrow I will talk about various structures of credit departments.
Until then,
Alan