My wife was telling me recently about how her (recently) former boss always refused to send their overdue accounts to collections. As a result, he has in the neighborhood of $2 million in past due account, some of them very old. It's a retail by mail business, so the accounts are mostly small amounts: $150 here, $75 there, and a handful of accounts that are $1,000 or higher.

I'm wondering the odds of telling him we will collect his old accounts and we want some percentage of what we collect. What's a reasonable percentage on that? 50%?

I was kind of thinking we would get whatever agreement and then just sell the portfolio to a collection agency. Let's say we sold $2 million worth of collections for $200,000. We'd take $100,000 and give him the other $100,000.

Any one here have experience with this sort of thing enough to tell me whether this is a viable plan?

I have a high school friend that does this. Pretty sure he told me ten cents on the dollar.

I've bought portfolios in the past and had mixed results. Factor companies will take average balance and average age and it sounds like both of those will limit valuations.

Location for various State regulatory requirements will also be used in pricing. Mail order is more difficult because there was really no relationship.

Collection agencies generally will send the Miranda Warning letter required, along with verbiage attempting to collect it and then maybe a few more letters on balances under $200. It costs an agency around $17.50 per account to meet all regulatory requirements. Use that and a probably recovery rate of 25% (depending on age) and you'll project total value of this kind of business.

$2m x .25% = $500k

$17.50 x 10500 accounts (assuming $190 avg balance) = $183750

$316,250 net collected. Again if these have a majority or high % of accounts over 6 months you drop that from 25% collection to 20% and 1/2%/month for every month over 6 months.

10 cents on the dollar, depending on age, is about what you can expect.

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My wife was telling me recently about how her (recently) former boss always refused to send their overdue accounts to collections.

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Sounds like he knows he could get more money and made a conscious decision not to chase it.

I do some medical billing, and I don't send to collections for a few reasons. First, it's not that much money in the grand scheme, and most of those people need it more than me. Second, it's a bad look and a fast track to a bad reputation. I work in a small town and making 2 dozen people angry will get me run off by the time they tell everyone and it spreads around.

Thanks for the info. Luckily I don't have to bill the clinic stuff, just ER visits and hospitalizations. I provide the care and then bill. So it's unexpected, after the fact, and there's not really a "refuse to provide care" option. To me it's just easier and cleaner to let it go and just write the bad debt off on my taxes.

ramblin_ag02 said:

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Thanks for the info. Luckily I don't have to bill the clinic stuff, just ER visits and hospitalizations. I provide the care and then bill. So it's unexpected, after the fact, and there's not really a "refuse to provide care" option. To me it's just easier and cleaner to let it go and just write the bad debt off on my taxes.

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Got it. Just be careful of audits if you write-off large amounts. The IRS has been known to eliminate the write-off of bad debt when no good-faith collection attempt has been made.

Since I've got your attention, how many notices of an outstanding bill do you need to send for it to count as good faith? Looking to save on paper and postage. Everyone gets a bill, because that's the law. Is that enough, or are 2, 3 or more notices needed?

I have done collections before it is a pain in the ass

To answer your question you need to setup a collections policy and follow the policy. The policy you have in place depends on how your company operates. If people are generally slow to pay due to shipping delays etc you will need a longer time to collect, but if payment is due immediately or in a week then you can likely have a shorter window to collect.

I'm not sure how large the amounts owed are, but for small amounts I would think 3 paper bills (and emails) and two phone calls over 90 days from due date would suffice. Now you don't have to write them off as soon as your policy allows, but I wouldn't write off before that time.

If you do double entry accounting (not cash basis) set up an allowance for doubtful accounts that uses some formula based on the value of your past due accounts to estimate and record your bad debt expense over time. Now for tax purposes you won't actually incur that bad debt expense until it is actually written off, but financial statement wise you will be more aware of where your collection deficiencies are.

If you have a large amount of uncollectible accounts getting some analytics into who is past due, how much is past due, and how long it is past due can allow you to work on collections that will give you more bang for your buck.

Assuming relatively small business. The people who owe you a $100 you might sends a few letters, emails and calls to. The guy that owes you $10,000, you call every few days. Reach out to all the contacts you have. If they are individuals, see if anyone in your company/circle knows them. If they are a company then see who else at your company communicates with them. Sometimes reaching out to a purchasing agent or manager will help you prod their accounting department along.

I worked for a large company so most of our large past due collections were other companies. We also had individuals. Due to the volume and individual might not show up on our radar till the balance was like $5000 or something. This is where you have to determine the cost of trying by collect versus the amount.

Anyone with a big balance I would use every resource available to try to contact to collect. I never harassed anyone, but often times people move or change their phone number or email. Google searches, social media, family members, Lexisnexus. I only went through that much effort for large amounts.

We didn't sell our debt since we were huge, but if you have a ton of deliquent customers owing small amounts selling the debt for money might allow you to recoup costs and not hire someone internally to do collections.

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Personally I never want to do collections ever again. If I ever open my own business I'm going to try to not ever offer a credit line to anyone. Payment due at time of service.

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