For any business looking back on disappointing financial statements from 2005, bad debts can be one of the most frustrating items on the balance sheet. Tracking down businesses and consumers who owe you money can be a drain on time and finances, particularly for small businesses.
If you’ve got bad debt on the books, it may be time to turn to a collection agency that specializes in bringing in payments from overdue accounts. The key is to choose an agency that has a decent chance of collecting your debts while presenting your company in a good light.
How it works
Collection agencies simply contact debtors and ask them to pay their bills. For larger debts, agencies typically send letters and make phone calls to the owners of delinquent accounts. Smaller debts may not justify the cost of phone calls, limiting the collection agency to simply sending collection letters. As a last resort, agencies may shift from a collection effort, where they simply try to convince the debtor to pay, to a legal one, where a court can settle a disputed debt.
Collection agencies have a reputation for using bullying tactics and intimidation to recover debts. However, this reputation is outdated. Collection agencies must comply with the federal Fair Debt Collection Practices Act (FDCPA), which requires that debt collectors treat debtors fairly and prohibits certain methods of debt collection, including threats and harassment.
In addition, most agencies find that by working with debtors and providing help with payment plans or other settlement options, they are able to recover a larger percentage of money for their clients.
When is it time to turn to a collection agency?
You can send past due accounts to your collection agency 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. 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:
Choosing a collection agency
Selecting the right collection agency is tricky, since it’s hard to predict a firm's success until they actually start working your accounts. A few areas to investigate:
Collection agency pricing
As payment, the agency simply keeps a percentage of the money they collect, usually between 20% and 35% but sometimes as low as 10% or as high as 50%.
The fee can vary depending on the age of the debt. It’s usually less for 30-day obligations and more for year-old debts. The fee will also go up for legal actions – fees of 40% to 50% are more common if a lawyer is involved.
It is important to balance the commission charged with the agency’s success rate. If you place a total of $10,000 worth of debt with an agency that has a 70% recovery rate and charges a 25% commission, you would collect a total of $5,250. If you placed the same debt with another company that only charges 10% commission but has a recovery rate of only 40%, you would only get $3,600. Be sure to consider the recovery rate when making your decision.
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