As a business owner, you naturally hope that clients and customers will pay you promptly. However, there may be situations where you have already provided goods or services and the customer has a contractual obligation to pay, but they fail to do so.
Typically, a business will try several methods to collect payment before escalating the situation. This may include sending invoices or repeated reminders that the balance is outstanding. If the issue is simply a communication problem or an oversight, these steps may resolve it.
In other cases, however, the debt is sent to collections, and a collection agency attempts to recover the money owed. What are some of the pros and cons of taking this approach?
Getting the money your business needs
The primary advantage of sending a debt to collections is that it may help your business recover much-needed funds. Without consistent cash flow, it can become difficult to cover operating expenses, especially for small businesses. In some cases, a collection agency purchases the debt outright, allowing the business to receive payment more quickly. This process is often referred to as invoice factoring, and it can help businesses turn unpaid invoices into positive financial gain.
Being paid less than was initially owed
The main drawback is that the business may not receive the full amount originally owed by the customer. Collection agencies typically purchase debt for a percentage of its total value. The remaining portion represents the agency’s fee, which it keeps after collecting payment from the original client.
Deciding how to handle unpaid debts can be frustrating for business owners who have not been paid what they are owed. It can be helpful to work with an experienced law firm while evaluating your available options.