The purpose of Collections is to ensure that delinquent accounts are reconciled and paid in a timely, cost-effective manner. Companies must balance direct credit losses and the costs of debt recovery judiciously. Most companies are willing to allow small debts to lapse if the cost of recovery starts to exceed the amount being collected. Companies can afford to devote considerable time and energy, however, to the collection of larger debts. Typically, collections agencies follow an escalation method based on the number of days the account has been delinquent and the amount owed.
Companies conducting first-party collection activities (i.e., collections handled by the original creditor) have more incentive to preserve and extend relationships with the existing customers, even if their account is delinquent. Acquiring a new customer is considerably more expensive than retaining an existing one; their primary interest, therefore, is to preserve goodwill with the debtor. At a certain point however, typically when the debt is 90 or more days past due, companies will enlist the help of a third party collection agency to collect past due account balances.