How First Party Collections Affect Your Business’ Cash Flow

If you’re a business owner or departmental manager who does any kind of collections activities, you’re already pursuing first party collections, though you may not have known it. First party collections means precisely that: attempting to collect on debt for your own company instead of sending your accounts to a third party agency. Any time you make a call asking to remit payment or send a past due notice you’re engaging in the practice of first party collections.

You’re considered the “first party” because you were involved in the original transaction, while the debtor is known as the “second party.” A “third party” doesn’t enter into it unless you hire a separate debt collection agency.

Third party collections are different from first party collections in a few ways. For one thing, there’s a lag in time from when a bill becomes past due to when a third party collector starts collecting, simply due to the exchange of files. Another difference is that third party collectors don’t have a personal relationship with the debtors, so they may not be cognizant of the need to remain on pleasant terms with them in the hopes of getting future business.

Often the debtor will be more inclined to try to please their original creditor, especially if you have a product or service that he or she needs in order to maintain their business. Sometimes a gentle reminder that you won’t ship any more items until their past due amount is cleared up is enough to get recalcitrant debtors to pay.

In addition, first party collections are not governed by the Fair Debt Collection act, believe it or not. This is because under the law the first party or its subsidiary is considered the lender rather than a collector and it means you can do some things that a third party debt collector can’t by law. There are still state and federal laws that apply, though, so make sure you are familiar with all applicable regulations if you go this route.

The rule of thumb for first party collections no matter what the industry is to keep trying to collect for 2-3 months. When you reach that milestone and haven’t yet collected, it’s typically a good idea to engage an outside agency or sell the debt, which means someone pays you up front for the right to collect on the debts.

The most successful first party collections are done by dedicated collections professionals. Salespeople, accounting staff and business owners just aren’t as capable at collections because their attentions are scattered and collections is one of the least pleasant tasks they have to do.

First party collections done by a dedicated staff is just a more efficient way of handling it. They can take continuing education on collections techniques and perform more collections tasks such as finding people using private investigation, working out creative payment arrangements or disguising collections as audits. First party collections that are operated like third party collections agencies are the most successful.

David P. Montana has written widely and served as a corporate consultant in collection agencies services for three decades. David gives more helpful tools and information about outsource billing service solutions.

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