For large Fortune 500 companies with strict credit and collection policies, there isn’t a decision to be made about when to send accounts to a debt collection lawyer. When an account meets the criteria, it’s automatically moved.
For everyone else, the decision to bring in a debt collection lawyer can be daunting. To make that decision easier, we’ve put together a list of nine key factors to consider.
1. Cash flow
Your company’s cash flow indicates whether the business has enough money to meet its expenses. Ample money indicates positive cash flow, whereas negative cash flow suggests financial difficulties or problems with collecting receivables.
2. Days Sales Outstanding (DSO)
Days sales outstanding or DSO indicates how long it takes to collect a receivable. A low DSO means you are collecting effectively; a high DSO suggests you are slow to collect.
3. Industry Standards
Someone selling apparel should not compare their DSO with a subcontractor working to improve real estate. Sure, both may invoice on net 30 terms, but the reality is that the industry standard to pay in one industry can be very different from another.
4. Collectibility
Collectibility of a receivable decreases as time passes. The likelihood of collection is best within the first 60 days. After day 61, collectibility sharply declines. For best results, focus your attention on collecting receivables within days 1–60.
5. Lost opportunities
Holding onto overdue receivables can cost you more than money; it can cost you opportunities. Ask yourself:
- Are limited cash reserves preventing you from investing in growth?
- Is valuable time being spent chasing old debts rather than pursuing new business?
Sometimes, outsourcing collections can free up the time and capital needed to move forward.
6. Financing
If you are seeking financing, the lender will want to ensure your accounts are paid on time. Lenders consider DSO and client concentration. If most of your business comes from one or a few main clients, they may consider that a red flag.
7. Cost
The cost of the receivable can mean a few things. Either the cost to your bottom line or the cost of hiring a debt collection lawyer. This cost might mean hourly fees or a contingency fee—if they don’t collect, then there is no fee.
Knowing that there is a decreased likelihood of collection after day 61, ask yourself what the downsides of sending the debt to a collection lawyer working on contingency truly are. Recovering 75% of a debt is far better than retaining 100% of nothing.
8. Emotions
Take a moment to evaluate your decision-making process. If you’re hesitating over when to send accounts to a debt collection lawyer, ask yourself why that might be. What factors might be informing your decision-making? It’s important to figure these things out so you can move past them.
9. Resources
Consider speaking with others in your industry. Industry groups and others in your field are the best resources. Ask them what their experience and outcome have been.
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