Jeff Tulchin, President and Walt Lockhart, Chief Operating Officer, STA International
In a turnaround situation, cash flow is almost always a major concern. Improving cash flow is a primary focus for a turnaround manager consulting with a troubled enterprise. Improving DSO with internal improvements at the client company can be crucial. But what about aged debt that is much less likely to respond to internal efforts – even improved internal efforts? The use of a third-party collection agency is a tried-and-true measure to stimulate cash collections on aged receivables. It requires no cash outlay by the client as the collection agency works on a contingency basis, only earning a reasonable percentage commission on all collected funds. Sending a file to a third-party collection agency sends a strong signal to uncooperative debtors that the creditor is no longer prepared to accept the debtor’s excuses or silence. It is an escalation that may get the debtor’s renewed attention and help convert an open receivable into a paid invoice.
Disputes can be unearthed and, if necessary, reasonable discounts and payment plans can be negotiated. Maximizing the success of your debt collection agency requires effective client support. The collection agency should be provided with a statement of account and any email correspondence with the debtor regarding non-payment. An email thread may allow the agency to identify additional points of contact at the debtor’s business that may not have appeared when the account was submitted for collection. These communications can also allow the agency to zero in on a disclosed problem – is it only cash flow or did the debtor raise a quality or delivery issue that requires a considered response? The client should also be prepared to support the agency’s request for additional documents, such as all invoices, proof of delivery, purchase orders, as appropriate. Acceptable settlement parameters can be provided to the agency at the onset or the client can choose to retain the right to review any/all offers of settlement.
The agency should specialize in commercial debt collection. Often, collectors will be required to interact with small business owners or principals and need to meet those debtors as professional business consultants. Commercial debt collection requires a problem-solving mentality and a good collection agent will communicate in a professional and respectful manner. In that way, the client’s reputation is enhanced (not damaged), as all companies are reflected in the professionals and agents they employ. Moreover, maintaining positive lines of communication is imperative as the debt collection process can easily be a multi-month process and if communication with a debtor is cut off due to animosity, it may never be regained.
In situations where a debtor’s financial viability is confirmed but the debtor still refuses to address the debt, the agency can forward the debt to an independent law firm located in the debtor’s jurisdiction. The client will be asked to authorize such legal forwarding on a case-by-case basis. If the law firm’s demand for payment is not addressed, the law firm, only with client’s authorization, can file suit. The advantages to the client: effective legal action, including the filing of a lawsuit, without any hourly fees. Court costs must be advanced but they will be quoted in advance for client’s consideration and approval.
Finally, there are literally thousands of collection agencies working in the USA. Fortunately, there are some factors that can help distinguish the wheat from the chaff. Choose an agency with a long history of financial responsibility, proper bonding and licensing, and certification from the industry’s most prestigious trade associations: the Commercial Law League of America and the International Association of Commercial Collectors. The certification process includes independent auditing of an agency’s trust accounts, ensuring that all client funds are handled appropriately.
To conclude – the use of a collection agency’s services can lead to enhanced cash generation from aged and written off receivables and should be a useful tool in every turnaround manager’s toolbox.