WHY SHOULD YOU OUTSOURCE YOUR COLLECTIONS?
When you have delinquent accounts, debtors might ignore your acquisition attempts and refuse payment. While you can make calls and send demand letters, collection agencies have advanced tactics to retrieve your money.
The longer debts go unpaid, the less likely they are to be repaid. If you prioritize outsourcing your collections to the proper agency as soon as possible, you have a higher chance of recouping the full amount.
WHAT IS THE AVERAGE COLLECTION RATE FOR A COLLECTION AGENCY?
The cost of hiring a collection agency varies. Agencies typically charge a percentage fee based on the type of collection (commercial or consumer), the amount of debt to be collected and the volume of business you provide.
Some agencies charge a flat fee; however, most charge a contingency percentage rate of 20% to 50%. Depending on the amount of debt you need to be recovered, commercial debt collection fees are typically 20% to 25% of the sums collected, and consumer debt collection fees are typically 30% to 50% of the sums collected.
If your case goes to court, expect to pay additional legal fees. Your agency will notify you before taking your cases to court, giving you the option to accept or decline. Most agency fees, including litigation, are typically charged after your debts are recovered.
HOW LONG CAN A COLLECTION AGENCY ATTEMPT TO COLLECT A DEBT?
While some collection agencies also operate as billing companies, most begin to collect on accounts that are 60 to 90 days past due. Each state has a statute of limitations, which restricts the length of time a debt can be collected. In most cases, states allow collection agencies to pursue debtors for four to six years after the last active payment on the account.
CAN A BUSINESS BE SENT TO COLLECTIONS?
If a business is past due on its payments, it can be sent to collections. The business then has 90 to 120 days to repay their debt, and if they fail to do so, the creditor can either sue the business or sell the debt to a commercial debt collection agency.
WHEN SHOULD A SMALL BUSINESS HIRE A COLLECTION AGENCY?
For a small business, tracking down unpaid invoices can turn into a full-time job. If your company is having trouble allocating time for this task, hire a collections agency. Another consideration, other than time, is if a particular client or company is hard to collect from. If you’re dealing with a difficult debtor, collection agencies are trained to handle this challenge so you can get what you’re owed.
HOW DO I HANDLE ACCOUNTS SENT TO A COLLECTION AGENCY?
Small business owners forced to send accounts to collections are often left wondering, “Now what?” Should you consider an account a bad debt and write it off, or should you list it as pending income? The short answer: Don’t write it off as bad debt – yet.
The strategy behind hiring a debt collection agency is to get some or all the money you are owed, so it’s better to classify it as an “other charge or awaiting collection” and add it to an account specifically for assets in collections.
If the money is not collected or you only get a portion of it, you would then write off the balance as bad debt.
CAN A COMPANY TURN A DEBT OVER TO A COLLECTION AGENCY IF PAYMENT IS BEING MADE?
Small business owners have the right to place an account in collections if the bill is past due, even if the customer is making payments. That doesn’t mean a few days late, but if the bill has gone unpaid for months and the client now wants to make some type of payment, you are not obligated to accept it.
It’s up to the business owner, but if the client is showing a good-faith effort, it’s often cheaper to collect the debt on your own than work with a debt collection agency.
WHAT ARE THE PROS AND CONS OF HIRING A COLLECTION AGENCY?
Hiring a debt collection agency has its benefits. When you contract with a collection agency, you tend to recover past due bills quicker than you would on your own. It also takes some pressure off you. Instead of worrying about sending demand letters or making phone calls, the collection agency does the work for you. Litigation protection is another perk. If you use DIY bill collection tactics that are too aggressive, you could face legal action. A debt collection agency knows the rules and regulations. They shoulder the risk if a debtor looks to sue.
There are some drawbacks to using a collection agency, and the big one is the fees. Collection agencies charge fees ranging from 20% to 50% of the debt. The older the debt is, the more it costs to recover it. The agency’s tactics can also affect your business. If the agency is too aggressive, you may lose customers or gain a negative reputation.
ARE YOU RESPONSIBLE FOR DEBT YOU SOLD TO A COLLECTION AGENCY?
When you sell the debt to a collection agency, they pay you a percentage and chase after the debt on their own. Once you sell the debt, you no longer have any involvement with it. You tend to get pennies on the dollar when you sell the debt to a collection agency.
How Does an International Debt Collection Firm Work?
U.S.-based businesses and entrepreneurs who have clients or customers located in other countries can experience problems collecting a debt owed to them. Further, due to differing rules and regulations depending on the country your customer is based in and different time zones, collecting that debt can be more complicated.
An international debt collection firm specializes in recouping money from individuals and companies in other countries. These companies usually have contacts around the globe, are knowledgeable about international laws, and follow the best collection practices based on the country and jurisdiction they are operating in. Many offer services for U.S.-based companies as well as foreign ones. If you are evaluating hiring an international debt collector to recover money owed to you, we recommend that you work with an international collection agency that is licensed, bonded and insured.
If a Company Only Has Small Balance Accounts, Is It Worth It to Hire a Collection Agency?
Most collection agencies will collect outstanding debt that exceeds $50. If you or your staff are spending too much time chasing down past-due bills and it’s hurting productivity or customer service, you may want to consider hiring outside help.
Another reason to consider hiring a collection agency is that these services are knowledgeable about the Fair Debt Collection Practices Act (FDCPA). If your collection tactics violate the FDCPA, you could face potential issues with the Consumer Protection Bureau and your state’s legal authorities. Last, the number of customers who are past due will also determine whether it makes sense to hire a debt collector. If it’s only a handful of customers who are past due, that may be manageable, but if you have several customers who owe you money, it may be best to hire help.
How can small businesses hire a collection agency?
Hiring a collection agency starts with conducting your research. Collection agencies cater to different industries and business types, which means not all of them will be right for you. For example, some collection agencies require a certain number of accounts in collections.
For your research, read reviews of different collection agencies, look at their Better Business Bureau standings, and read what customers are saying online. Once you narrow down your list of potential agencies, take the time to contact them. Ask about their qualifications and credentials, success rate in recovering debt, customer service tactics, and fees.
It’s also important to discuss how the agency will work with you. Is there an online portal where you can track your accounts’ progress? Does the agency have live customer support, or are you assigned your own customer service representative? Finally, ask for references that can vouch for the service, and check them. Once you’ve done all that, you’ll feel confident in your choice for collection agency.
What can small businesses do to collect debts on their own?
Small business owners can deploy several strategies on their own to recover debt. It’s when those efforts aren’t successful that it’s time to call in the professionals.
Many small businesses dealing with past-due bills will first try reminders through email, by text, over the phone or in person to get the customer to pay. Some wait until a bill is 30 days past due – or even longer if they have a strong relationship with the customer. Whatever timeframe you set, the first step is to send out reminders.
If that fails, the next step is to send a formal demand letter – a written document detailing what the client owes and ways to repay it. Using the demand letter to offer a payment plan or forgive part of the debt can be an effective strategy. Some states require a formal demand letter if you plan to take legal action against a customer.
The longer you wait, the harder it is to recover debt. If you are still getting nowhere after all that, it’s time to consider hiring a collection agency.
What kind of businesses hire collection agencies?
From dry cleaners to retailers, collection agencies attempt to recover debt for an array of businesses. If there is debt to be collected, there is an agency that will try to recoup it. With so many collection agencies in the market, some try to differentiate by catering to specific industries. Others will only collect debt from consumers, while some work solely on B2B accounts. Then there are the collection agencies that will recover from both. You’re type of business, industry, and size of the debts will dictate which collection agency makes the most sense.
Why is the collection agency’s reputation important?
When you hire a collection agency, it is an extension of your business. If you hire one that uses aggressive tactics to recover debt, it could hurt your relationship and reputation with customers, or worse get you in trouble with regulators. Not to mention if you go with a less scrupulous firm, they may charge inflated prices or fail to recover any debt.
What are the benefits of early intervention when it comes to collecting debt?
Typically, small businesses wait for at least a month or a month and a half before taking steps to collect on a past-due bill. However, acting sooner, say five or seven days past due, can yield better results. The sooner you begin to collect past-due debt, the more likely you are to recover it. Intervening early requires you to evaluate the credit history of your customers to pinpoint any payment risks, create different account groups based on their payment history and develop control groups to determine how many customers will default. That takes effort on your part. The other option is to outsource it to a debt collection agency. The money it costs to outsource it is typically worth it though. Keep in mind that some customers won’t pay unless they are notified or contact is made, which is another reason early intervention can be beneficial.
Can your collection efforts hurt your online reputation?
The answer depends on how the company collecting debt for you behaves. If the firm uses overly aggressive tactics or tries to scare and shame people into paying past debt that could harm your reputation, particularly online. Studies have shown dissatisfied customers are more likely to complain on social media and online review sites than those who aren’t. You may think it doesn’t matter because the customer in question didn’t pay anyway, but if you get a lot of negative comments online it can have a big impact on your business. The best way to avoid that is to select a collection agency that is empathetic, shares its collection tactics with you, and has a strong reputation in the marketplace.
Which types of businesses are most likely to use collection agencies?
Collect agencies attempt to recover debt for their clients from consumers and businesses. Their services apply to a range of industries and business types. Some of the businesses likely to enlist a collection agency include retailers, personal services and spas, hospitals and medical services firms, gyms, vets, and landlords. On the commercial side, it also encompasses a variety of industries including accounting, construction, marketing, shipping and logistics, and manufacturing.
How can accounting software help small business owners avoid the need for collection agencies?
Some small business owners end up in situations where they aren’t getting paid by clients because they were late in sending an invoice and didn’t follow up right away. It’s understandable, business owners have little time to run operations let alone bill and chase down non-paying customers. Accounting software automates the invoicing process. You can create and save invoices, automatically send alerts when payment is due and when it is late, and even allow clients to pay within the invoice. All of that is designed to make it as easy as possible for customers to pay you and reduce the likelihood you have to chase them down to get paid.
Is it worth it to hire a collection agency?
Hiring a collection agency is worth it if the agency you select is able to recover money from your delinquent customers. It is also worth hiring a collection agency if it frees up time for you to focus on growing your business. Often small business owners spend a lot of time chasing past due bills, giving them little time to focus on new opportunities. The amount of debt owed to you will also help you determine if hiring a collection agency is worth it. For instance, if you have a couple of customers who owe you $10,000, it’s advantageous to seek help recovering the debt. If it’s a few hundred dollars, it may not be. Ultimately you have to compare the cost with the amount you hope to recover to determine whether a collection agency is worth hiring.
How do collection agencies give you legal protection?
When it comes to collecting debt from consumers, there are several laws on the state and federal levels designed to protect consumers. They govern the practices a business can employ to collect past due debt. If a business runs afoul of those laws, it could face fines and penalties. That is where collection agencies come in. Reputable ones understand the state and federal laws and adhere to ethical practices when recovering debt. Using a collection agency reduces the likelihood you could make a legal mistake trying to collect a debt.
What is early invention collections?
Many business owners will wait for a bill to be at least 30 days past due before attempting to collect, but increasingly some organizations are initiating collection efforts when a bill is just five to seven days past. Some are even collecting on invoices that are only one day past due. Known as early intervention collections, it can help business owners segment their accounts and determine future risks. Not only do businesses that collect early tend to get paid back more, but it prevents customers from getting hit with any late fees or penalties. That could boost the relationship between the customer and business.
What are some warning signs that customers will not pay back their debt?
Small businesses can never be sure which customers will pay back their debt and in what time frame. But there are some telltale signs that can clue you in. A big one is if a customer that has always previously paid on time starts making late payments. That could signal the client is struggling financially and is having a hard time paying its bills. Another sign is when an easy-going customer starts complaining. They could be employing a tactic to get out of paying their bills. Finally, if the customer tells you he or she will pay after switching bank accounts that could mean there isn’t enough money to cover the bill.