What Is the Corporate Purpose of Debt Collecting?

Any company that issues bills, particularly companies that regularly extend some form of credit to their customers, either in the form of a loan or another kind of payment, are familiar with debt collection. When a business collects on a debt, it's collecting money that's owed to it for services rendered. Collecting on a debt fulfills a number of different functions for the business.

Debt Collection

Debt collection can take various forms: contacting the party to remind him of his debt obligation, filing suit against him for breach of contract or garnishing his wages, for example. Yet, all of these forms are designed to help secure the creditor payment of the money that's owed him. The main corporate purpose of debt collection, therefore, is to generate revenue for the business that's carrying out the collection.

Collecting Funds

One of the main reasons that a company spends money collecting debts is that spending money on the collection of debts often makes sound financial sense. By spending money on a means of collecting money from outside parties, the company is, often, able to take in more money than it spends. In addition, the company wants to give the perception that its customers must pay its bills or face legal action.

Debt on Books

In addition to generating funds, companies often engage in debt collection because having accounts that people haven't paid on a company's books doesn't look good to investors. Even if a company is able to collect only a fraction of the amount of money that it's owed, this is still revenue that the company can place on its books. By contrast, uncollected debt leaves a gaping hole.

Punitive Fees

Companies can actually make a substantial amount of money through assessing penalties on debts. For example, payday lenders and credit card companies often charge very high interest rates and fees on unpaid debt. The threat of having this debt collected on leads borrowers to pay these fees. Thus, in effect, the debt collection acts as a form of generating revenue that the company wouldn't otherwise have access to.