Collections is More Costly Than You (Probably) Think

Post date :

Jul 28, 2023

When you hand over a client to a collection agency, you'll usually end up paying fees between 20% and 50% of the amount collected. With margins (in most cases) below 20% for the home services industry, turning a delinquent account over to collections means that your best-case scenario to essentially have done the work for free, or at least at cost. But that's assuming that:

  • You can achieve a 20% profit margin

  • Your collections result in full payment from the client

  • You're able to find a collection service at the low end of standard fee structures

Simply put, every customer you turn over to collections is likely to turn into a zero-profit account at best and probably loses you money. Considering these agencies only collect between 20% and 30% of outstanding debt, the outlook for you covering your costs or turning a profit on any accounts in this scenario is grim. 

So, what can you do to steer clear of these issues in the first place and avoid finding yourself with expensive delinquent accounts?

  • Payment Terms - How are you arranging payment terms? Are you collecting deposits or a percentage of the total up front? It's best practice to at least collect the cost of materials ahead of performing one-time services. For recurring services, having a payment method on file, such as a credit card, helps protect against underpayment. It's also important to make sure that you communicate to the customer how you'll be structuring payment terms up front. This avoids surprises down the road or denial from the client on agreed to terms. Get it in writing if you can. A large number of service providers have started using digital quotation or agreement tools to streamline their quotes and make payment terms clearer and more enforceable.

  • Accurate Quotes - Customers routinely complain about ‘ballooning costs’ and unforeseen expenses. While it isn't always possible to guarantee a price before the work is done, clients generally do not appreciate significant cost overruns. The closer you can be to your quote the better. It can also be useful to give a high/low range that takes into account some standard overrun % or ‘what if’ pricing - “What if we had to move that beam?” Ultimately, you want to get paid for the work you do, and having clear expectations is going to reduce contested invoices for work you’ve already done. 

  • Clear Scopes of Work - Create an agreed-to list of deliverables and timelines. That way you can avoid ‘scope creep.' Scope creep is when a project gets incrementally bigger and bigger over time, often without the service provider realizing the full cost increase to themselves. Get in writing what will be delivered, and if there are big items the buyer turns down, make sure to list that they are NOT provided. Clarity and transparency can help avoid arguments over expectations when payments come due. 

  • Client History - Customers often have a number of outlets to get reviews on vendors. Sites like Angi, Google, and word-of-mouth investigation allow for background checks without much effort. We recommend that (when possible) you look for customer references or history with other vendors. Do they work with any other vendors you know? Have they gone through a bunch of vendors previously (ask them)? There are basic background check tools that you might want to look into for larger projects. The client is shopping for a service, you are looking for a good customer. 

  • Timely Billing - It’s important to bill clients any final remaining amounts as soon as the work is completed. The longer you wait, the more time there will be for the work to degrade or for the client's enthusiasm for the project to wane. Make sure you have a way to send final invoices digitally to speed up the process and reduce any effects from buyers' remorse. As they say - strike while the iron is hot.

  • Ease of Payment - The easier you make it to pay, the more likely you are to get paid. Electronic invoicing in tools like QuickBooks and will make it easy to accept online payments. Accepting credit cards via phone or even field acceptance on site will lower the barrier to payment. There are many field payment options available today that allow you to accept credit cards on site. 

Being proactive to avoid collections can be a big boost to your profit margin because, as we see from the fee structures above, accounts that end up in collections at best break even, and probably cost you money. Avoiding these events will drive those amounts directly to your bottom line.