“Ask CashFlo” is a credit and collections advice column for small businesses. Questions may be submitted via email to flo@askcashflo.com. Follow Ask CashFlo on Twitter @AskCashFlo. CashFlo reminds readers that she is not an attorney and nothing in this column should be construed as legal advice. As CashFlo always says, “When in doubt, consult your attorney”.“
Dear CashFlo,
I have to pay my collection agency a percentage of anything they collect. I asked them to add their collection fees onto the debt, and they said no. What’s up with that? Why should I have to pay for the cost of collection?
Nervous in Nyack
Dear Nervous,
My dear friend, CashFlo must remind you that if your collection agency is paid a percentage of what they recover for you, you are not really “paying” them anything. If you are not paid, you have nothing, and your collection agency recovering for you is getting you something. So do not blame your agency for the cost of collection. You like being paid for the work you do, right? So does a debt collection agency!
A little semantics – As part of the bad debt recovery process, a debt collector cannot arbitrarily add fees. So, they are not adding fees onto your debt, but rather attempting to recover all or part of your cost of collection.
Now, can your debt collection recover your costs of collection? CashFlo’s answer is a definite maybe.
Three factors will determine whether you can recover all or part of your cost of collection:
1. Federal and state laws – When you hire a collection agency make sure they understand and comply with all the laws that regulate them. If the law says they cannot pass on your cost of collection, you do not want them to do so.
2. Type of customer – consumer or another business (consumer collection versus commercial collection). Different federal and state laws apply. Generally, consumer collection is more regulated than commercial collection.
3. Customer contract – You have one right? Well, likely not if you are like many small businesses. Even if your state permits the recovery of costs for your type of customer, your customer must be made aware and agree to the fact that non-payment of a balance will mean they are responsible for costs of collection. This is the part where CashFlo wags her finger at you Small Business Owner and tells you that the small amount of money you spend with your attorney on a good customer contract will save you thousands in time. So contact your attorney today!
So, if your agency tells you they cannot recover your collection costs, it is probably because of one or more of the factors listed above. You cannot change the first two factors, but the third – having a contract with the right collection language is all on you!
Yours truly,
CashFlo
PS There are many more things small business owners can do to reduce bad debt. Download our free tip sheet today!
