There are various challenging aspects to handling the financial side of business transactions, be it the rendering of services or provision of goods; one must deal with customers and payment woes in all cases. A rising issue most businesses face is the mounting accounts receivable resulting from unpaid accounts and elusive customers, making debt recovery harder and the revenue stream thinner. With this, there is also the rise of challenges of commercial collections, where businesses need help to recover unpaid accounts from other firms. These challenges can create a roadblock in a company’s accounts receivable and revenue. To carry out proper B2B commercial collections, you must ensure a robust internal collection system to properly recover unpaid accounts stuck in collections. To understand the implications of having commercial collection challenges, let us know what they are and what it means to conduct B2B collections.
What is Commercial Collection
A business renders its goods or services to another company in exchange for payment or against credit. If customers fail to pay the amount, this amount becomes your accounts receivable, and you need to recover this amount to help your cash flow. Recovering the unpaid invoices from other businesses against those services and goods is called commercial collections. This process of recovering unpaid accounts from customers is also known as B2B commercial collections or business-to-business debt collections.
Various challenges arise in managing commercial collections, primarily recovering the amount that would otherwise serve as your revenue stream. However, most businesses need to act faster and end up with considerable debt that needs to be recovered to revive cash flow. This is among some of the significant challenges in commercial collections. Let us explore how commercial collection challenges can be managed.
Challenges of Commercial Collections
Complexity of Accounts
Recovering unpaid accounts from other businesses is more complex than consumer debts because there are usually a few things to consider. With commercial debt, the implications are more significant, and a more extensive system exists to handle and navigate. This phenomenon is often also known as complex debt. What is complex debt? The challenge surrounding the recovery of larger accounts in commercial sectors is the complexity of the debt. That raises an adjacent question: what is a complex debt instrument? This instrument encompasses debt securities and financial instruments with intricate structures and features of terms. These instruments often refer to derivatives, financial instruments whose value derives from an underlying asset like bonds, stocks, and commodities. Additionally, a complex debt instrument can have complex repayment structures, embedded options, and variable interest rates – all of which can burden businesses considerably on the commercial collection process.
To navigate the complexity of accounts, businesses must decide how to develop strategies for business collection, including risk assessments, legal game plans, and devising alternative dispute resolution mechanisms to recover commercial debt effectively. One crucial aspect is always to keep a detailed record of all transactions, communication, correspondence, and actions taken during the collection process to avoid any issues later.
Payment Cycles and Delays
Debt collection is a challenging feat by any measure and an even more complex one when you consider the amount of debt that mounts up in B2B collection processes with high-value debts. A regular part of the recovery process is the payment cycle. A payment cycle definition is the period it takes for a business to complete its financial transactions, including accounts payable and accounts receivable. The process begins with invoicing customers for goods and services rendered and paying suppliers or vendors for goods or services received.
The timeline from the invoices generated to the customer to their payment for the service is just the start of the payment cycle. Even after the amount has been paid, the business that has lent the service or goods has its obligations of paying vendors and suppliers, known as accounts payable. This payment stage heavily relies on prompt payments from the customers who acquired the goods or services to make good on their promise to pay on time. Any lags in this stage will inadvertently affect the following process in line with accounts payable.
Altogether, this entire process is the progression of the payment cycle. A knowledgeable and experienced accounting team is required to mitigate the risk of a lengthy payment cycle. Accounting firms can leverage the skills of their accountants, accounts payable, and receivable specialists to manage the accounts payable and payment cycle effectively. Most businesses struggle with proper payment cycle management because of a lack of internal resources, creating considerable delays in prompt repayment of their invoices.
Disputes and Negotiations
One of the most common challenges in commercial collections is disputing a debt in collections. Customers must know that their accounts are going into collections or need to remember their pending payments. They usually end up disputing collections and asking for proof of their debt before they are compelled to pay. Commercial collection managers often must deal with this recurrence by contacting customers to validate whether their debt is legit and then convincing the customer to pay their outstanding balances. A business dispute over debt can once again hinder the commercial debt collection process, slowing down the recovery of unpaid accounts while collection agents work to resolve debt disputes.
One of the significant techniques to resolve disputes is to negotiate business debt. Business debt collection agents are trained in negotiation techniques and communication skills to convince customers to resolve their disputes. They use cordial communication, complaint scripts, and other one-on-one communication techniques to address the customer’s concerns and move the debt recovery efforts forward. Despite the sincere efforts put in by debt collection agencies towards commercial debt negotiation, there are often long wait times during which the debt is stuck in dispute, which hinders the recovery process for a business, causing further restrictions in the cash flow. A viable solution to handling disputes is to have a trained debt collection staff with sufficient training in handling disputes with solid communication skills and experience on the collection floor so they can deal with different kinds of consumers and develop payment strategies after resolving issues about business debt.
Customer Relationship Management
Sometimes, a debt recovery agency can try everything, and there will still be a percentage of customers that will not pay. There are various reasons, but a consistent issue in commercial collection is dealing with delinquent clients. Delinquency means when a customer puts off paying their debt so long that the likelihood of recovering that amount becomes more remote as time passes. These clients who refuse to pay or cannot pay are known as delinquent clients. A recurring issue in commercial collection is to devise strategies to contact, locate, and convince delinquent clients to pay their debt. However, delinquency is not the only issue; maintaining positive customer relationships is a more significant issue. Preserving relationships is essential in business as the viability of your business depends heavily on retaining customers and fostering long-lasting relationships. However, non-payment and non-cooperation can cause a rift in this process to such an extent that businesses will sometimes have to compromise their hard-earned customer relationships, apply pressure, and use persuasive strategies to compel customers to pay their debt.
Commercial collections deal with businesses recovering debt from other companies, and in such situations, preserving long-standing relationships is essential because the downside is losing collaboration with a business you rely on and considerable revenue in the process. Most companies would lose 80% of their customers when they are put in collections, closing all doors for future collaborations. This is the stage where most companies would engage debt collection agencies to manage their debt recovery process and work on recovering hard-to-recover accounts. But the damage will be done by the time you reach this stage. The alternative to this is to act on delinquent accounts as soon as they go past their due date for payment. Only when accounts become seriously past due can they cause severe losses as businesses pay the amount in collections. Early intervention is the way to mitigate the risk of high accounts receivable, where you act fast when customers do not pay and engage in third-party collection efforts to maximize your recovery potential before it gets too late.
The Legalities of B2B Debt Collection
Once an account becomes delinquent and it becomes challenging to recover the amount despite debt recovery efforts, additional steps need to be taken. If a customer refuses to pay or is highly late on their payments, businesses have no choice but to engage in legal action. Various legal issues surround distressed debt because cordial communications fail, and assertive collection strategies further harm whatever is left of your customer relationships. If the situation escalates to a point where a customer cannot pay their debt, a business must hire legal counsel to carry out legal collections. This process is usually reserved for these seriously past-due accounts with little hope of recovery. In this case, collection agencies procure legal counsel and settle the debt because recovery becomes impossible.
Involving legal action in the collection process is quite cumbersome as most businesses do not have the resources or the financial bandwidth to do that. They will often have to take the help of collection agencies with legal counsel on their roster to manage legal collections, but often at very high legal fees and involving lengthy court proceedings. Most legal issues surrounding distressed debt end in settlements, as companies want to conclude collection efforts on a delinquent account and customers want to get the weight of the debt off their back – so the result is an investigation of existing assets that customers have, so they can sell those assets, like a house or vehicle and pay off the debt. It is not the ideal conclusion, but it is often the only choice when all efforts to collect debt amicably and then forcefully fail.
Financial Instability of Debtors
Even though recovering debt is not easy, it is worth considering the debtors’ or customers’ equally tricky situation. One of the most common causes of delinquent accounts is debtors experiencing financial hardship. In commercial collections, there are usually fewer issues with individuals facing economic instability and more businesses struggling to stay afloat. Most small businesses that rely on the goods or services of large companies will end up in collections because they cannot reconcile their expenditures and need help to make regular payments on the services and goods they acquire. These businesses often struggle with financial instability in debt repayment and will mostly suffer from delinquency. Most debtors who cannot pay have poor financial management skills and land in this sticky situation because they do not plan. In some cases, the businesses that cannot pay their debt are handling their own accounts receivable issues and are stuck in their own collection processes, creating a cyclical financial deficit for them – hence pushing them further into delinquency.
Even though businesses often face issues of financial instability, only some do reach out and consider debt financing or financial counseling. A recurring problem of economic instability can make debt repayment harder. Still, businesses can hire debt financing agents to budget their spending and carve out small amounts of money from their profits to repay their debt. It is always an ongoing struggle to meet debt recovery deadlines, but with a bit of insight and expert help, most businesses can find a workaround to their debt disability.
Management of Commercial Debt
Unlike individual consumers, businesses often deal with large transactions, meaning they have high debt value when they do. Being unable to pay large debts puts a dent in a company’s cash flow, often leading to bankruptcy. But it does not have to end that way since most businesses also look out for any financial pitfalls and seek financial counseling. Any company that fails to repay its debt eventually succumbs to debt settlement or sells its debt. However, going a step back, debt management can help businesses get control over their finances to find solutions to their overwhelming issues with debt.
Commercial debt management often involves engaging an accounting team that can devise strategies for financial planning and cost-cutting solutions. Smaller businesses must have commercial debt management strategies that can expand existing revenue, budget a debt repayment plan, and devise ways to save costs in manufacturing, shipping, and inventory. Financial analysts are helpful in this case because they can assess the situation of the business and recommend actionable measures that can help set up a debt repayment structure without compromising the existing expenses of the company. To achieve proper debt management data, a primarily assigned team should keep track of all the money spent and ensure timely and regular payments toward clearing debt to avoid bankruptcy.
Adhering to Compliance in Commercial Collections
When managing commercial debt collection regulations, the Fair Debt Collections and Practices Act must universally apply to consumer debt. But that does not mean that there are no checks and balances when it comes to commercial debt. Usually, there are contractual agreements between businesses in commercial debt collection, multiple state regulations and laws and industry regulations that streamline and monitor commercial debt collection practices.
However, there are variable debt collection compliance standards that are often overlooked when collecting debt from other businesses. Since the deb value is usually high in commercial debt collection, companies frequently resort to aggressive tactics to recover their unpaid accounts and forgo contractual obligations that delay efficient debt recovery. One of the reasons that commercial debt collection becomes cumbersome is the need for adherence to debt collection compliance and debt settlement compliance, which leaves many businesses without safeguards, due to which they incur huge losses in accounts receivables and cash flow. This challenge remains ongoing, but stricter industry regulations and state laws can help regulate commercial debt collection compliance violations, mitigating compliance risks that would continue to rise. It is harder to monitor compliance when businesses are internally making collection efforts, as they may need to know which rules to follow. However, involving a debt collection agency ensures that compliance is maintained throughout the debt collection process.
Cost of Commercial Collections and Hiring Collection AgenciesÂ
There have been considerable challenges to navigating commercial collections, especially for businesses that need more resources. Small businesses often need help to get help from third-party helping agencies to recover unpaid accounts, especially when the cost is a factor. Despite the ample possibilities of outsourcing your debt collection processes to a collection agency, most businesses would be hesitant due to cost issues. Based on where you are, the cost of debt collection services can vary across states, keeping many companies from engaging debt collection agencies for commercial collections.
Various factors would impact the debt collection costs, starting from the complexity of the debt to service fees charged for contingency collections. Businesses that do not act fast and engage collection agencies sooner often incur a higher cost for debt collection services. Another consideration is the cost of debt collection software since most agencies implement skip tracing and scrubbing to validate debt and locate customers for debt collection. Businesses must manage this cost when engaging a debt collection agency, which can be challenging if proper budgeting is not implemented. There are various challenges in managing the cost of debt collection processes through a business collection agency. But that does not mean there is no way out of those challenges.
Based on your business needs, you can find reliable commercial collection agencies that provide packages and subscription models for collection. They ensure that your collection concerns are addressed with innovative solutions and technological advancements to speed up debt recovery and revive cash flow.
Searching for a collection agency that suits your business needs and can continue collection efforts as you like is essential. Do some research for a reliable agency with a good reputation and history of recovering unpaid accounts, even if they are hard to recover. Cedar Financial is your ultimate AR recovery partner if you are looking for a reliable commercial debt collection agency. With over 30 years of experience in the ARM industry, Cedar Financial has robust debt recovery systems that can help recover the most stubborn debt. They train their commercial collection agents to negotiate debt disputes and manage settlements and legal collections through their vast network of attorneys nationwide.
Suppose you need help managing your commercial collections. In that case, you need a strong force in the industry that can streamline your recovery efforts and maximize your revenue without depleting your already vulnerable resources. Partnering with Cedar Financial can provide a comprehensive path to collections, aided by the best-in-class collection talent and recovery strategies honed over decades. Many challenges might be plaguing commercial debt collection, but none can be overcome with a reputable and dependable commercial collection expert like Cedar Financial.
Contact us for exceptional commercial debt recovery!
