Hiring a debt collection agency is a great move for a small business. However not every debt collection agency is right for your business. If you are looking, here are some factors to consider:
The first step is to determine your collection goals
You must be clear on your goals and the approach you want to take with delinquent customers before you look to hire a debt collection agency. Would you take some customers back once they pay their debt to you? Do you want a gentle collection approach, or do you want an agency that will be able to take a file through litigation and post judgment collection?
Use a customer contract to lower your collection costs
Do you want to pass collection costs along to delinquent customers? If you do, you need to plan for it before you provide credit, not after. Credit customers should sign a contract that clearly outlines not only your payment terms, but also the consequences of non-payment. For example, “ All accounts with unpaid balances over 90 days with no approved payment plan will be turned over to our collection agency. Customer understands and agrees to be responsible for any and all collection costs.”
Late fees and finance charges must also be contracted beforehand. Simply having collection costs and finance charges on your invoices after the fact is not enough.
Various states limit the amount of collection costs your agency can recover. You have no chance of recovery, however, unless you contract for them beforehand.
Rates – Not all are created equal.
Collection agencies generally work on a contingent fee basis, which means that you pay no money upfront, and the agency is compensated with a percentage of whatever money they recover. Be careful to ask what is (and what is not included in the rate.) A low rate may mean that the agency is not going to put forth much effort.
In some cases, a debt collection agency will offer a low per-file fee for collection. These fees are usually based on a large number of files and paid in advance. An agency is only going to do a certain amount of work if they are only earning a small fee. Be very careful with this approach.
Ask questions about how the agency will go about collecting for you and how long they will continue working on your files. Remember that a debt collection agency gets involved after you have suffered the loss (non-payment). A debt collection agency is therefore a recovery agent. Your goal should always be to recover as much as possible.
If a 10% rate gets you 0 results, you still have 0. It is not a question of the lowest rate, but the rate that gives you the best value.
Research – If you cannot find them, you cannot get them to pay.
Our society is transient. People move, change phones and jobs more often than ever. Over half of accounts referred for outside collection need some sort of research. How willing and how able is your agency to do this work? And back to the question of rate, is there an extra charge for research or is it included in the rate.
Other factors to consider are:
Location: Do you want a local collection agency or a national one?
Licensing and Bonding: Some states requires licenses and bonds, some do not. Know the laws in your state before going forward.
Language Capability: Your customer base may mean you will get the best results if your collectors speak more than one language
Systems, Training and Compliance – Is your agency compliant with the Fair Debt Collection Practices Act (FDCPA). HIPAA Compliant? Do they have adequate protections for the security of consumer financial information?
Credit Reporting – Is it important to you? How and when does the agency report?
If you take time to consider these critical factors, the debt collection agency you choose will be a trusted partner that improves your cash flow and saves you time and money.
