Creditors Exercising Options for Receivables Management

Creditors seeking help managing cash flow have great flexibility choosing not only among providers of receivable management services, but also among the services themselves. Given the growth and sophistication of the accounts receivable management (ARM) industry over the past 10 years, creditors now have options that did not exist in recent memory.

So, which of these services should creditors be considering? Which of these services provides creditors with the greatest returns? What risks are associated with each of these choices?

An overview of today’s ARM industry begins to answer these brief but important questions. The 6th Edition of The Kaulkin Report classifies the industry’s services from the perspective of the creditor and by the stage of the collection service in the receivable’s life cycle. The industry’s four major markets are analyzed in turn.

Contingency Collections
Contingency collections is defined as a third party service provided by collection agencies to creditors that have delinquent or charged off receivables. The collection agency is paid on a commission basis, typically defined as a percentage of the total amount collected by the agency. Accounts, or placements, are provided to the collection agency for a finite period of time, which can range from several weeks to several months or years. Uncollected accounts are generally returned to the creditor at the end of the placement period.

Contingency contracts are negotiated either on a gross fee basis, in which creditors receive recovered cash and pay agencies in turn, or on a net fee basis, in which agencies collect cash from debtors and pay creditors in turn. Government agencies, large financial institutions and some telecommunications companies are paid on a gross fee basis, while contracts with smaller creditors tend to be structured on a net fee basis.

The provisions of contingency contracts vary widely depending on the sophistication of the creditor. Large banks, which have decades of experience contracting with contingency agencies, tend to be among the most sophisticated creditors. Conversely, local creditors such as doctors and small utilities may lack sophisticated, internal collection practices. The smaller contingency agencies that collect these accounts generally expect better terms from these creditors. For example, some smaller creditors do not recall accounts at the end of the placement period.