Introduction to debt collection agencies
Debt collection agencies can help solve one of the most frustrating problems in business: bad debt (i.e. money that is owed to you that you are unable to collect). While there are ways of handling the problem internally, tracking down the debtors and implementing a debt recovery solution can be a drain on time and finances, particularly for small businesses.
To recover the money that's owed, many businesses turn to collection agencies that specialize in bringing in payments from overdue accounts. A debt collection agency's tactics and behavior will reflect on your company, so the key is to choose one that has a decent chance of collecting your debts while presenting a respectable image.
This BuyerZone Collection Agencies Buyer's Guide is designed to give you the facts you need to hire a collection agency for your business. Once you know what to look for, BuyerZone can connect to you qualified collection agencies that will help you get the money you are owed.
How collection agencies work
For larger debts, collection agencies typically send letters and make phone calls to the delinquent account. Smaller debts may not justify the cost of phone calls, limiting the collection companies to simply sending collection letters.
As a last resort, most collection agencies will shift your bad debt recovery efforts from a collection effort, where they simply try to convince the debtor to pay, to a legal one, where a court can settle the disputed debt.
To some people, collection companies have a reputation for using bullying tactics and intimidation to recover debts. However, this reputation is outdated and undeserved. Collection agencies must comply with numerous state and federal statutes such as the Fair Debt Collection Practices Act (FDCPA), the Federal Trade Commission Act, and the Fair Credit Reporting Act (FCRA), which all require debt collectors to treat debtors fairly and prohibit certain methods of debt collection, including threats and harassment.
In addition, reputable agencies find that by working with debtors and providing help with payment plans or other settlement options enables them to recover a larger percentage of money for their clients.
It's important to note that if your collection agency does not comply with regulations concerning the treatment of debtors, you could be held liable for their behavior in a lawsuit. This is why it is vitally important for you to carefully evaluate each agency you are considering hiring.
When is it time to turn to a collection company?
You can send past due accounts to your collection company as soon as you decide it is unlikely they are going to pay you. This can be as soon as 30 days after payment is due or up to a year or more, although the newer the debt is the more likely that the agency will succeed in recovering the funds. Once you transfer an account to your agency, the firm will handle all the communication and settlement details for that account.
Here are some indicators of when you should turn an account over to a collection firm:
- Your customer makes repeated, groundless complaints to try to get out of payment.
- The customer flatly denies owing you any payment, despite your records.
- The customer doesn't respond to your final notices and attempts to create payment plans.
- A customer changes his or her address or phone number without leaving forwarding information.
Choosing a collection agent
Choosing a collection agent is tricky, especially since it can be hard to predict a firm's success with delinquent accounts ahead of time. A few areas to investigate:
Experience with your industry
Your business may require unusual collection tactics or have specific regulations that apply (for example, collections for medical practices must adhere to HIPPA). It is wise to choose an agency that is familiar with your specific needs. Government, student loans, and medical accounts are all examples of when specific expertise is important.
Reputation of the firm
Make sure to check a collection agent's references, particularly from clients that are in a similar business. Call the references and ask their opinion of the collection services, if they have had any problems, and what their typical success rate is. Also check the company’s standing with the Better Business Bureau and whether or not they are accredited by industry groups like the International Association of Commercial Collectors.
Method of collection services
As mentioned earlier, you may be held liable if your collection agency doesn't interact with debtors in accordance with numerous laws. Be sure to examine the letters that will be sent, ask about the training telephone collectors receive, and review the scripts their representatives use so you can be sure the agency’s methods are professional and respectful. Also, find out how they handle legitimate excuses or hardship cases.
How they handle skiptracing
"Skiptracing" refers to how the collection agent finds debtors who have disappeared and can no longer be directly contacted. This is particularly important when collecting from individuals. Fortunately, newer technologies have made this job somewhat easier in that the various databases collection agencies rely upon are more likely to be cross referenced and up to date. Agencies may also use the Internet or contact friends and family in an attempt to locate debtors; however, they must carefully comply with applicable regulations.
Some states require collection agencies to obtain licenses before they can pursue debtors located in that state; others require different licenses for agencies headquartered in their state. Ask potential agencies what states they are able to collect in, and how they handle accounts in other locations. Often, agencies forward accounts from outside their coverage areas to other agencies, which can save you the hassle of shopping for agencies that cover many different areas, but will result in a lower percentage of the collected debt being returned to you.
Bonding and insurance
A payment performance bond ensures that you get paid when the agency collects on one of your delinquent accounts because if they do not you can file a claim against their bond. When considering an agency be sure to check the status of their bond and whether there have been any claims against it.
An Errors and Omissions Liability insurance policy can benefit both you and your collection agent by protecting against lawsuits unhappy debtors might file for perceived harassment. An up-to-date policy can be a sign of a collection service that is responsible and conscientious.
Your collection agency should streamline your administrative processes as much as possible. They should be able to provide whatever reports you need and remit payment of collected accounts in the form and on the schedule you dictate. Many agencies today offer 24/7 online access to your account so be sure to review the customer interface: is it easy to use? Does it provide you with detailed information on the status of each collection?
Some agencies also offer services such as billing services, accounting, and other administrative functions, to compliment their debt collection services. This can be an easy way to ease the burden on your accounting department.
Collection services don't require long-term contracts or exclusivity. Try a few different vendors and see which produces the best results before settling on one firm. Even after you have chosen a primary collection agency, it can be worthwhile to send a few delinquent accounts to a different agency just to compare ongoing performance. Important note: do not send the same account to more than one agency--that is illegal under the FDCPA.
Collection agency pricing
Debt collection is usually done on a contingency basis. This means that the collection agency keeps a percentage of money that is collected. Depending on a variety of factors (such as the age of the debt, the average amount owed, the volume of collections you have, and even the demographics of your client base) commissions can range from 10% to 50% of the recovered amount, but are usually average around 25% if the delinquency is less than a year old. Check out real examples of the collection agency rates other BuyerZone users are paying.
The collection agency typically has about the same administrative overhead when collecting large debts compared to small debts, but because the larger debts will yield a higher dollar amount the percentage you pay is typically lower. Newer debts also have lower fees because they are more likely to be recovered than older debts. If an account is passed from collections to a legal action the fee may go up, as well – fees of 40% to 50% are more common once the agency involves a lawyer.
It is important to balance the commission charged with the collection agent's success rate. If you place a total of $10,000 worth of debt with an collection agent that has a 70% recovery rate and charges a 25% commission, you would collect a total of $5250. If you placed the same debt with another collection agent that only charges 10% commission but has a recovery rate of only 40%, you would only get $3600. Be sure to consider the recovery rate when making your decision.
The advantage of contingency billing is that you don't pay for uncollected debts. However, some collection agents won't offer contingency services for small debts. In these cases, you will typically pay a fixed fee for a series of letters or calls.
Be wary of any collection agency that quotes you a fee that seems unusually low. This could be a sign they are using tactics that are out of compliance with the FDCPA.
Tips for hiring a debt collection agency
Good communication between your business and the debt collection agency is essential to good results. Before you start, be sure to find out:
- How information about delinquent accounts will be transferred to the debt collection service
- When and how collected funds will be forwarded to you
- What reports are provided to detail the collection progress and success rates
- How you can stop debt collection if you receive payment or credit an account
The debt collection agency will be better able to do their job if you give them complete information. For each account that you send over, provide as much of this information as possible:
- All the basic contact information: business name, DBAs, all the contact names on file, addresses and phone numbers, including faxes, cell phones and pagers
- Indicate if your mail has been returned
- Names of other creditors who your customer works with
- A complete history of the transactions you are trying to collect on and any customer disputes
You should also make sure the debt collection agency understands your business: your industry, your products, and your accounting system. The more information they have, the better the chances that they will be able to help you recover the money that is owed to you.
How to avoid accumulating bad debt
Of course, the best policy for any business is to avoid getting into situations that require a collection agency. There are several ways you can reduce your outstanding bad debts:
Be careful when offering credit
Carefully check credit references of each new account and don't extend more credit than the firm can handle.
Explain transaction terms thoroughly
Make sure your accounts know when you expect payment, and clearly detail any credits or penalties for early or late payment.
Follow up overdue accounts
Don't expect customers to police themselves; instead, make sure to promptly send statements and reminders of payment due dates.
Institute a series of overdue notices
You should schedule regular written and oral reminders before even considering a collection agency. This will not only help save money, but will also avoid the ill will that can be generated when using a third party to collect the funds.
Set an absolute due date and stick to it
As a final step, set an absolute due date before the account is turned over to a collection agency. Don't extend the deadline, but do give the debtor warning of this final payment date.