No small business owner wants to send a customer to collections and we encourage to set up a program in-house to monitor and follow up on aging receivables. However at some point it is time to escalate the issues, and hiring a debt collection agency.
Many small business owners have never worked with a collection agency before and when I speak with them, they are curious about a number of issues such as how the process will work or repercussions to their business. One of the top questions, however, is how much debt collection will cost their business.
The cost of debt collection depends on a number of factors.
Most collection agencies use a contingent commission compensation model, which means their fee is a percentage of any sums recovered. No collection means no fee. Rates vary, primarily based on aging of the debt. The older the debt, the higher the fee.
If a debt is over a year old our collection fee is likely 50%. Is that too expensive? Well consider the following:
- The value of your delinquent receivables is zero. Until you are paid, that receivable cannot be used to feed your family or grow your business.
- You can use a customer contract to offset part or all of the cost of collection. Your contract must be signed in advance and must include customer’s agreement to bear all costs of collection. If you take the time to include this wording in your contract, your agency can add at least part of their fee onto the debt and collect it from your customer, depending on state laws.
- Your collection agency agrees to attempt to collect the debt for you before knowing the financial status of the customer or any other factors that might limit successful collection. Try to think of any other business that gets paid solely on results. If you hire an attorney to sue someone, you pay rather or not you get a favorable result. If a contractor comes to your home to look at a project, you may often pay an hourly rate, even if you decide not to proceed. A public relations firm can write great press releases and place them in key publications, but they cannot guarantee you business will result. A collection agency cannot guarantee they will collect all the money for all the files you send them. However, if they are not successful you do not pay the agency.
So with a guarantee of no collection=no fee, it is not a question of whether or not a collection is too expensive. It is a question of how can you afford not to give them the opportunity to collect for you?