The coming boom in debt collection opportunities may well be a double edged sword for the typical UK collection business, which will face major organisational challenges in growing to meet demand.
Of course, the credit crunch is not the only factor driving business expansion in the UK collections industry. The sector has seen significant merger and acquisition activity, with many of the biggest names – including Gothia Holding and Cabot Financial – buying smaller businesses in 2007.
Equally, Credit Services Association (CSA) research shows that creditors are consolidating their debt collection agency (DCA) portfolios, aiming to work with a smaller number of larger agencies. This naturally encourages expansion, since DCAs want to have the scale to take on, and not be overwhelmed by, the larger consolidated contracts that may be offered to them. Most collections agencies in the UK are relatively small businesses. According to Plimsol research, only a quarter of agencies employ more than 225 people, and more than half employ fewer than 75.
Given capital limitations and the probable lack of formalised training programmes among such businesses, they would probably struggle to take on larger volumes without damaging their own profitability.
Scaling up
The challenges of scalability are by no means confined to the lower end of the collections industry. In fact, larger businesses may find it even harder to scale up. While they may have the capital – or at least easy access to lines of credit – to fund expansion, larger organisations may be less flexible and entrepreneurial when it comes to growing their operations. Equally, many large-scale collection businesses are simply groupings of small-scale acquisitions, each with their own distinct set of small clients, with little or no corporate structure on top.
The apparent size of a DCA business may therefore not be a reliable indicator of its ability even to handle a large contract, much less to scale up rapidly.
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