Debt collection agencies introduction
Collection agencies can help solve one of the most frustrating problems for businesses:
bad debt, which is money that is owed to you that you are unable to collect. While there
are ways of handling the problem internally, tracking down the deadbeats 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 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 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.
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How collection companies work
Collection companies work by asking debtors to pay their bills. For larger debts, companies 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 companies 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 a 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 However, this reputation is outdated and undeserved.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 companies 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.
Some collection companies 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.
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. 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.
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Choosing a collection agent
Choosing collection services is tricky, since it is 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 that some agencies may be more familiar
with than others. Government, student loans, and medical accounts are examples of when specific
expertise is important.
Reputation of the firm
Make sure to check 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.
Method of collection services
Examine the letters that will be used and judge whether they will be effective with your customer
base. Also ask about the training telephone collectors receive to ensure their methods are
professional and respectful, and find out how they handle legitimate excuses or hardship cases.
How they handle skiptracing
“Skiptracing” refers to how the collection agency finds debtors who have disappeared and
can no longer be directly contacted. This is particularly important when collecting from individuals.
Agencies should have access to online search capabilities and telephone databases to help locate these
debtors.
Geographic coverage
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.
Insurance
An Errors and Omissions Liability insurance policy can benefit both you and your collection services
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.
Shop around
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.
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Collection agents pricing
Debt collection is usually done on a contingency basis. This means that the collection agent
keeps a percentage of money that is collected. Depending on the size of the business, collect agents commission
can range from 10% to 50% of the recovered amount, but are usually between 20% and 35%.
Some collection agents vary their fee depending on the age of the debt, charging less for 30-day old
debts and more for those over a year, simply because they are more likely to be able to recover
newer debts. The fee may go up if an account is passed from a collection agent to a legal action 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.
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Debt collection agency tips
Good communication between your business and the debt collection service is essential to
good results. Before you start, be sure to find out:
- How information about delinquent accounts will be transferred to the agency
- 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 collections if you receive payment or credit an account
The debt collector 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 collector 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.
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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.
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