Certainly, every small business wants to lower the cost of their collection agency fees. It is important, however, to understand that not all rates are created equal, and a good understanding of what is included (or not included) in the rate is vital when hiring a collection agency.
Collection agencies are generally compensated in two ways: flat per file fee or contingency. A flat file fee is a low fee that is paid in advance of any collection. It is paid on every file whether or not any money is ever recovered.
The advantage of a flat file fee are its low cost. However, if you have done a good job, and spent 90 days or so contacting delinquent customers in your own in-house efforts, you have definitely gotten much of what is considered “low hanging fruit” Disadvantages of this approach are that it is usually only available to companies with large numbers of files for collection, and it is priced to do only a certain amount of work.
Years ago a prospective client, a dentist, told us that he had over 200 delinquent patient accounts and had made an arrangement with an agency that charged him only $29.00 dollars a file to get his money. The money – nearly $ 6,000 – was paid in advance to the agency. For the $29.00 fee, the agency sent one notice, made a few phone calls and reported it to the credit bureaus. After 18 months, the agency had recovered only $1,200 for him and told him that in order to proceed to “Stage 2 Collections”, a high rate would be needed. The dentist was so angry and confused by the process that he let the accounts go and lost all that money owed to him, plus the balance of the original fees he paid.
A contingency debt collection fee means that no money is paid upfront and the agency is compensated with a percentage of monies recovered. Rates can vary based on many factors: the aging of the debt, volume of accounts placed, or size of the file placed.
Advantages to this approach are that a business has no upfront expense. The collection agency is has an incentive to work hard to recover bad debt as they receive no compensation at all if unsuccessful. The contingency fee should be structured to include all services necessary to get the job done. The disadvantage of the rate is that it could, in some instances be more expensive that a flat fee per file.
There are many collection agencies to choose from, and finding an attractive contingency rate should be easy. The lowest rate is not always what it appears to be though. One of our clients, an electrician, received a very competitive rate quote from an agency. When he looked closely at the contract, however, he realized that the low rate did not apply to any file under $250.00 or any file that needed research (40-50% of collection files do). Legal fees were also not included in the rate. It turned out that the great rate he thought he had only applied to a third of his files. Never pay additional fees for research. It is party of what a debt collector does to get the job done, and should be included in the rate.
If you are lucky enough to land a very low rate, watch to make sure you are getting the very best results from your collection agency. A low rate means nothing if the agency does not recover your money.
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