Payment collection is one of the biggest and most stressful challenges that companies face in the construction sector. When payments do not come on time, bigger financial troubles are highly likely to follow. This is true especially in an industry like construction that heavily depends on managing supply chains and credit payments.
Since late payments are quite common in the construction business, so is the use of external payment collection experts. There are numerous debt collector agencies that specialize in collecting payments from delinquent construction clients.
However, hiring a construction debt collection agency may not always be your ideal choice, depending on the circumstances you are dealing with.
- When should you hire a collections agency to collect construction payment?
- Why hire a collections agency for construction?
- How to hire a collections agency?
- How does construction debt collection work?
- Factors to consider when hiring a debt collections agency
- What makes a good construction collections agency?
- Advantages and disadvantages of hiring a debt collections agency
- Best practices for hiring a debt collections agency
When should you hire a collections agency to collect construction payment?
There are many reasons to hire or not to hire a debt collections agency to handle your late payments. Before you decide to work with a construction debt collection agency, take note of the following reasons when you should say “yes” to hiring one:
- When you are short-staffed
Dealing with late payments will take your time and effort away from potentially more important and more pressing concerns. Instead of focusing on the actual work, you instead pool some or most of your resources just so you get paid.If you are short-staffed, it is best to hire a debt collections agency. This way, your current staff can work on their primary responsibilities, and you can let the debt collection experts pursue payment from your difficult clients.
- When you are dealing with high volumes of unpaid accounts
Allocating resources to deal with one or two late payments may not be too difficult to handle. Managing multiple late payments from more than one client is, however, a different story. You will need more resources to handle and pursue a high volume of payment delinquencies, and hiring a debt collection agency maybe your best course of action.You should also consider evaluating your credit policies if you constantly find yourself dealing with late payments. There may be loopholes in your credit approval processes that you need to address so you are able to vet your clients properly.
- When you are unsure how to handle complicated delinquencies
Sometimes the problem isn’t about your resources or the number of your unpaid invoices. It is also possible that you simply do not have the expertise to handle specific payment delinquencies.There are clients that may completely cut all ties with you so you are not able to contact them in any way. There are also clients that can be difficult to bankrupt, and so you need debt collection professionals to get them to pay up.
Why hire a collections agency for construction?
To ensure the health of your company’s cash flow
Your business needs a smooth-sailing cash flow for it to stay afloat. If most of your clients do not pay on time, your cash flow will suffer, and your business might crumble along with it. Hiring a collections agency is one way to mitigate this risk. When you work with debt collection experts, you pay professionals to ensure that you receive the payment that you worked hard to earn.
To maximize your current resources
Pursuing delinquent clients for payment can drain your resources. Hiring a construction collections agency can help you maximize your resources instead because you get them to keep their eyes on the more important responsibilities that have nothing to do with late payment collection.
To seek the help of experts in handling payment delinquencies
As mentioned earlier, they can be complicated clients whose late payment accounts are more difficult to handle. Licensed debt collection agencies have the training and expertise to work with these difficult clients and get them to honor their payment responsibilities.
How to hire a collections agency?
Hiring a debt collections agency is pretty much like hiring any third-party contractor to do a specific job. Knowing what you are looking for is important, and so is doing diligent research to land on the best company to do the job.
Do your research
Conducting thorough research is the first important step. You can use the Internet to survey the best debt collections agency in your area. Read client reviews, assess how they package themselves on their company website, and take note of the contact information.
Keep in mind that you are not expected to choose a debt collection agency at this stage. Your goal by doing research is to narrow down your pool of candidates based on readily available information online.
Contact potential debt collection agencies
After narrowing your search to a list of potential debt collection agencies you can work with, the next step is to contact your candidates via email or telephone. The initial contact is when you explain to a debt collection agency your reasons for needing their help.
The collections agency might also ask you questions about your situation, and they are most likely to ask you how old the unpaid invoices are. This is because each state has a different statute of limitations or a specific period of time in which a debt is still collectible and unexpired.
Assess the associated charges
During the initial contact or after subsequent consultations, the debt collections agency will provide you a quote for how much their services will cost. The amount that a debt collection agency charges is usually given as a percentage rate. For example, one collections agency may ask for 30% of the expected payment, while another may ask for only 15%.
Note that cheaper may not always be better in this case. A more seasoned debt collections agency may ask for a higher rate because they have already established a high success rate in collecting payment. A relatively newer agency may require a lower price simply because they need to sign in new clients.
Sign a contract
Once you have chosen a debt collections agency to work with, you must sign a contract with them. The contract will define the terms and conditions of your agreement and will also specify the rate that the collection agency will be charging.
You should read the contract before signing. Look out for possible hidden charges. Some debt collection agencies may ask for a fixed price on top of the additional rates for successfully collecting payment.
Forward the accounts to your chosen debt collection agency
When the contracts are all signed, the last step is to forward to the debt collections agency the accounts of your delinquent clients. They will be handling them from here on out, and they will use their resources to contact your clients, negotiate with them, and get them to pay up.
How does construction debt collection work?
Different debt collection agencies have different processes. A general workflow for debt collection follows the four-step process in the table below.
Signing a contract
When you hire a debt collections agency, you enter into a contract with them, and you establish the terms and conditions surrounding your agreement. Some debt collection agencies only handle debts that are greater than a specific amount (e.g., more than $500), and most of them, if not all, will only work on unpaid accounts that are within a state’s statute of limitations.
The statute of limitations is the period in which an outstanding debt can be chased. In most states, this period ranges between three to 10 years. When a debt is already older than your state’s statute of limitations, it becomes more difficult to pursue, and so debt collection agencies are less likely to work on them.
After you have signed a contract, the collection agency becomes responsible for chasing payment from your client. They will call or reach out to them, and they will ask for payment on your behalf. A good debt collector will not harass a client and will instead use expert negotiation skills to seek payment.
Other than direct contact, automated emails and text messages may also be used by debt collection agencies to get in touch with your clients. Collection agencies are expected to use and mobilize all resources at their disposal so that you get paid.
If a debt collection agency does its job right, it will secure payment from your clients and settle the outstanding debt. Depending on the volume of unpaid accounts you have, payments may arrive all at once or come in batches.
For example, if a debt collection agency is collecting payments from five different clients, only two of those clients might pay within the next two months. The debt collection agency will continue to work until the next three clients finally pay up.
Before the debt collection agency hands over the collected payment, they will first deduct the rate you agreed to pay. Most debt collection agencies charge between 25% to 50% of the payment. So if, for instance, your clients paid a total of $5,000 and the debt collection charge is $30, the debt collection agency will only give you $3,500 and will keep the remaining $1,500 for themselves.
Factors to consider when hiring a debt collections agency
The collection agency’s expertise
It is highly recommended that you select a debt collections agency that regularly works with construction clients. They are most likely to understand the urgency of recovering payment, and they also have the expertise that can help you deal with industry-specific issues.
The collections agency’s reputation
You would want to work with a debt collections agency that has a good track record when it comes to successfully collecting payment. A debt collection agency’s reputation may be assessed by doing online research and also by talking to client references and asking them about their experience with the agency of interest.
The collection agency’s charging rate
Working with a debt collection agency can be costly. Before you choose to decide if you must hire a collections agency or not, assess your finances first and see if hiring one will be worth it. If the amount you spend handling your accounts receivables is higher than the cost of working with a debt collector, then it is best to simply hire a debt collections agency.
What makes a good construction collections agency?
- They specialize in your industry
A good collections agency is one that understands your needs and how your industry works. A good construction collections agency will, for example, understand the role of filing a mechanics lien in payment recovery.
- They have good references
A good collections agency has already worked with a number of clients. Ask a debt collection agency for references, and make sure to speak with those references to gain an understanding of how competent a debt collection agency is.
- They can tailor their services according to your specific needs
A debt collector specializing in the medical sector may know about HIPPA regulations, but this may not be relevant to a material supplier in construction. A small debt collection agency may have software that can send automated emails, but they may not have the resources to directly speak with clients to claim large amounts.A good debt collection agency is, therefore, one with capacities and resources that are tailored to your needs.
Advantages and disadvantages of hiring a debt collections agency
Advantages of hiring a debt collections agency
- You only pay the agency if they successfully collect payment
Most of the time, a debt collection agency will only charge you if they successfully get your client to produce the payment. This means you do not have to pay extra even if you lose money in case your client does not pay up.
- You get help from experts
Good debt collectors know what they are doing. They can negotiate with clients, and they can even take the heat on your behalf. This way, it is them who appear to be the “bad guy.”
- You optimize your resources
When you work with a debt collection agency, you and your staff can take your mind off of late payment collection and instead focus on the more important tasks. You can increase everyone’s productivity by taking one important responsibility off of their place.
Disadvantages of hiring a construction collections agency
- You lose part of your payment for every successful payment collection
Debt collection charges can be high. You must therefore consider the losses that working with a debt collection agency may incur before you decide to hire one.
- Your clients might feel threatened
Some clients may feel threatened and offended if you get a debt collection agency to speak on your behalf. This may sour your relationship with the client, and you run the risk of losing a client eventually.
- You might not get paid altogether
Debt collection agencies are not guarantees of payment. They will do their job to get you the money that you worked hard for, but there is still the risk of not receiving your money altogether.
Best practices for hiring a debt collections agency
- Do your research before choosing a debt collection agency to work with
Know who the popular debt collection agencies are in your city, and read what clients say about them online. Ask them for their business references and make sure to contact those references. By doing your research, you are able to arm yourself with the knowledge that will help you choose which debt collection agency is best suited for your needs.
- Assess your current payment collection practices to see if further improvements can be made
A debt collection agency enters the picture after late payments have already occurred. One thing you can do to minimize late payments from happening — and to potentially reduce the cost of having to hire a third-party collection agency — is to improve your current payment collection practices and your credit policies.Are you vetting your clients thoroughly, and are you sending your invoices on time? Ask yourself these questions to identify points for improvement in your current practices.
- Select a collections agency based on your specific needs
If you are looking to recover a relatively small amount, going with a smaller and less costly debt collection agency will probably make more sense. If you are after a particularly difficult client who owes a large sum of money, choosing a more established but pricier collections agency may be the best option. Whatever you choose, always go with a debt collection agency that can handle your specific situation.