Most businesses have a credit sales policy because of the competitive edge that it lends. However, credit sales can be a double-edged sword, ushering in the possibility of bad debts. Although it might lead to higher sales figures, bottom lines can take a hit, if collections are not handled well.
The average company writes off about 4% of its accounts receivable as bad debts, according to research from Anytime Collect. If that doesn’t sound too high, that translates to a whopping $400,000 per year for a business that makes USD 10 million. For small businesses as well, a bad debt rate at that level can weigh heavily on profits and stall growth.
This is why a sound debt collection strategy, that focuses on sustainable arrear reductions rather than a list of collections promises, becomes important.
While putting a collections strategy in place, very often, businesses end up adopting a reactive approach rather than factoring risk into the plan, in the first place. According to the Urban Institute, in 2017, 71 million adults in the United States had debt in collections – this translates to 31.6% of all adults with a credit file. Predicting which of your customers may fall into this category, based on their past records, can help reduce delinquency rates.
A business’s communication strategy also holds the key to effective debt reduction, with the means and timing playing a pivotal role in debt management. For instance, instead of waiting to contact customers after the due date, reaching out a few days earlier can increase the chances of honoring payment. A 2013 study of micro-borrowers in Philippines noted that the number of loans (with unpaid balances after 30 days) reduced by almost 40% because of a text message before the due date.
It is also important to focus on the legal implications of communication for debt collections. Automated text messages could work as a reminder if the customer has opted-in for communication. However, the Telephone Consumer Protection Act restricts automated dialers from contacting mobile numbers directly, and this needs to be factored in while creating a plan.
An effective debt collections strategy will have to combine Analytics, Communications, and Legal knowhow to fashion a plan that delivers high hit rates, while ensuring a smooth experience that guarantees customer retention.
A 360º Approach to Collections – The Allsec Advantage
Allsec’s Credit Risk Management team provides solutions to every aspect of the challenging debt collections process. Beginning with distinct predictive models that provide effective debt profiling of customers to skip tracing, multilingual support, and strong customer relations-based contact strategies, the solutions should address every single pain point of debt collection.
Our Human Call Initiator Program navigates TCPA rules, while lifting customer penetration rates to 100% and improving hit rates from 8 to 18%. With transparent payment plans, our proprietary technology, and deep domain expertise, Allsec will not only simplify the debt cycle, but optimize your collections results, and minimize operational costs.