How Small Businesses Hire a Collection Agency


If you have unpaid customer invoices, you are not alone. A 2017 report from Sage titled “The Domino Effect: The Impact of Late Payments” found that 10% of invoices never get paid or paid so late that the company is forced to write them off.

If you are a small or medium-sized business owner, you probably don’t have the staff to devote to fulfilling 1 in 10 invoices. If it is a large number of unpaid invoices for your business , it may be worthwhile to hire a collection agency to deal with clients who do not pay their bills. But where are you going to start?

Editor’s Note: Looking for a collection agency for your business? If you are looking for information to help you choose the right one for you, use the questionnaire below to have our partner site, BuyerZone, provide you with free information from various suppliers:

Do your research

Different agencies have different specialties. For example, some are better at getting results from large companies, while others are skilled at collecting information from home businesses. You will want to make sure that you are working with a company that will actually meet your needs.

Ask if they are qualified

It might sound obvious, but before hiring a collection agency, you need to make sure that they are qualified and licensed to act as a debt collector.

Not all states require collection agencies to be licensed, but most do. Before you begin your research, understand what the licensing requirements are for collection agencies in your state. This way, when you are interviewing agencies, you can speak intelligently about your state’s requirements.

Check with the agencies you speak with to make sure they meet your state’s licensing requirements, especially if they are located elsewhere. You will need to confirm that they follow the rules of the Fair Debt Collection Practices Act.

You should also check with your Better Business Bureau and the Commercial Collection Agency Association for the names of reputable and highly regarded debt collectors.

Understand how they will work for you

Although you may pass these debts on to a collector, the collector still represents your business. You need to know how they will represent you, how they will work with you, and what relevant experience they have.

When you consider collection agencies, ask them what tactics they use in their collection process. Just because a tactic is legal doesn’t mean it’s something you want your business name associated with. A reputable debt collector will work with you to come up with a plan you can live with that treats your old clients the way you would like to be treated and still gets the job done.

Sometimes debtors leave town, and one tactic many use is to skip tracing. This means that they have access to certain databases to help locate a debtor who has not left a forwarding address. This can be a good tactic to ask specifically.

You should also dig into the collector’s experience. Have they ever worked with companies in your industry? Is your situation outside of their experience, or is it something they are familiar with? Relevant experience increases the likelihood that their collection efforts will be successful.

You should also discuss with the collection agency how they will work with you. You should have a point of contact with whom you can communicate and receive updates. They should be able to clearly articulate what is expected of you during the process, what you will need to provide, and what the pace and triggers for communication will be. The agency you choose should be able to meet your chosen communication needs, not force you to accept theirs.

Are they insured?

If an agency is not forthright about its practices and you later find out that it is too aggressive, that agency and possibly your business can be sued by the debtor.

Whether or not you win in such a business, you want to be sure that your business isn’t the only one taking the lead. Get proof of insurance from any collection agency just to be sure. This is most often referred to as an errors and omissions insurance policy.

Be prepared to pay

Debt collection is a service, and it doesn’t come cheap. In many ways, it’s the last resort before giving up on unpaid bills altogether. This is important to remember this when discussing fees when looking to hire a collection agency.

There are generally two payment structures that you can expect when speaking with a debt collection company.

Payment on collection: In this model, the business works on debt collection and pays your business when the collection is made. Their fees are generally a percentage of each invoice. The catch is, if the collector settles for less than the invoice amount, the agency’s fees don’t go down.

As an example, let’s say you negotiate that 25% of each invoice will be kept by the collection company. If you have a bill for $ 1,000, the agency fee would be $ 250. However, if the debt collector negotiates a $ 500 settlement with your client, you will only see a quarter of the original invoice amount.

Debt buyback: This is the easiest method, but it also requires the debt collector to take the most risk. As a result, this model tends to be the more expensive option.

When a collection agency buys your debts, they pay you a percentage of the unpaid bills. If you have $ 50,000 in unpaid bills, an agency may pay you $ 15,000 to buy them from you and then collect the unpaid amounts. All the money they collect is theirs now.

Using a collection agency can help you recover lost income due to bad debt. But businesses need to be careful when hiring a debt collection company to make sure that they are properly licensed, experienced, and will represent your business well. Debt collection can be expensive, but the amount you receive from unpaid bills can be worth it.

Can you break your contract?

Once you’ve signed an agreement with a collection agency, it can be difficult but not impossible to break. Check your contract for a termination clause. Otherwise, contact the agency and negotiate such an arrangement directly.

A termination clause could allow you to break the contract by paying a fee or providing notice within a specified time. There may be a deadline in the agreement by which if the agency has not delivered, you can adopt an escape clause. Or if the company presents a fraudulent agreement, you can usually break the contract. But you will want to consult a lawyer first.

A substantial breach of the contract could be grounds for termination. For example, if they don’t follow through on key points of the contract, you may be able to break the deal. Or you can just ask the company what their cancellation fees might be.


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