The US is home to many industries, including debt collection. In 2019 alone, debt collection accumulated approximately $11 billion in revenue. This comes at the turn of a downward cycle, thanks to new regulations concerning debt collection. Despite stricter control and oversight, the industry continues to generate significant revenue. In the US, most American consumers carry some form of debt. It is not common for circumstances to arise where borrowers are unable to fulfill their obligations, resulting in lenders resorting to debt collection techniques. Using debt collection software offers an efficient and viable alternative to most current collection methods. This blog explores how.
The Problem With Current Debt Collection Methods
For the purpose of this blog, debt refers to borrowed funds that accrue interest the longer they are paid. Ultimately, the compounded amount becomes too much for the borrower or debtor to handle. This usually prompts the lender to resort to debt collection to salvage as much of the loaned amount as possible. This is very different from a late payment on your cable bill. Your Spectrum basic cable price may see an added figure or late payment, but this is not likely to accrue as your service will likely be suspended. In the business world, however, lenders are rarely as forgiving.
Unfortunately, the same aggression that makes debt collection successful has also earned it a sinister image in the consumer world. There have been several instances of agents trying to collect a debt that has already been paid or trying to collect from a consumer who has no debt in the first place. That’s not to mention how aggressively debt collection agencies pursue loan defaulters in court. Obviously, debt collectors are not looked upon kindly, and aggressive ones can do more harm to your brand image than the funds they recover. This is why corporations need to look into debt collection software. These programs can execute a number of functions, including:
- Identify the Risk of Bad Debts in the Early Stages
- Automate the Process Whereby Outstanding Debts are Collected
- Debt Records are Always Up-to-Date Accurate
- Mitigate Risks Throughout the Debt’s Life Cycle
Let’s examine these in more detail below.
Identify the Risk of Bad Debts in the Early Stages
Bad debts are bad for business. They represent money that may be impossible to recover since the borrower is unable to pay both the principal as well as the interest on the loan. If enough borrowers default and become bad debts, your business could run into some serious cashflow problems. Since businesses need cash to manage operational expenses, this could impair business continuity.
Of course, it is not possible to accurately predict which debtors will default on their loan and which ones won’t. But it is possible to measure the risk of a borrower becoming a bad debt. Understanding this risk or probability can help you mitigate the chance of losing money to bad debts. This is one key area where debt collection software can prove very useful. It can measure credit risk based on a number of metrics, including:
- A borrower’s credit history.
- Their ability to pay back the loan.
- How much capital they have on hand.
- What conditions apply to the loan.
- Whether the proposed collateral is sufficient to meet the debt.
Automate the Process Whereby Outstanding Debts are Collected
Debt collection software also offers businesses the advantage of automating certain aspects of the collection function. Debt collection is a time-consuming process, requiring different teams to coordinate with each other while managing a lot of paperwork. This is inefficient and hampers productivity, while also increasing the chances of errors and mistakes. Process automation has proven to be very beneficial to most businesses. It helps to reduce any procedural inefficiencies as well as improving overall accuracy. This frees up more human resources to focus on the actual collection or other crucial parts of the process that cannot be automated.
Debt Records are Always up-to-Date Accurate
In the financial services industry, especially when it comes to lending and recovery, accurate and reliable records are a key ingredient for success. However, manually maintaining spreadsheets to be updated periodically is an outdated way to maintain records. It has a higher probability of errors, mistakes, typos, and even fraud if the conditions permit. Debt collection software offers integrated recordkeeping which ensures you always have access to accurate information whenever you need it. Since the software keeps updating your database in real-time, you will always have a clear picture of outstanding debts at any given time. This also goes a long way to ensure your debt collectors don’t mistakenly end up harassing responsible borrowers.
Mitigate Risks Throughout the Debt’s Life Cycle
The risk of a borrower defaulting on their loan isn’t the only risk lenders have to contend with. From time to time, you may have to deal with legal proceedings, as many debtors try to fight your claims. Debt collection software doesn’t just crunch numbers and display figures. It also has the capacity to store all relevant material on a particular borrower. That means it can archive lending contracts, supporting attachments, and a history of communication between borrower and lender. Coupled with its strong recordkeeping abilities, debt collection software can give you all the necessary information on a specific borrower for you to support your litigation.
Certain programs can also store secure copies of a debtor’s borrowing history. Remember that consumers have credit ratings based on their financial activity. For instance, if a person has been dodging billing calls from the Brighthouse Spectrum phone number, you can’t really tell as a third-party lender. But you can count on their non-payment having an impact on their credit score. Poor credit scores carry a higher risk, which can help your company prioritize its lending appropriately.