Debt collection is the pursuit of payments owed by individuals or businesses. An organisation that specialises in collecting debts is known as a debt collector or collection agency.
A debtor, the individual or entity that owes the debt, may fail to make a payment as and when due for a variety of reasons. It could be lack of financial planning, an unforeseen event, a dispute over what is being owed, and dishonesty of the creditor or the debtor.
Regardless of the origin or cause of the debt, the time comes when you, as a Small Business Owner, will choose to engage the service of a debt collection agency. Before thinking of hiring a credit collection agency, you would have been through the early stages of attempting to collect the debt. You would have evaluated how much is owed, how many days the payment has passed due date, and the debtor’s situation.
Conscious that the longer you wait to collect a debt, the harder it becomes to collect, desiring to maintain good customer service, hoping that the debtor may still be a customer, your phone calls will stop short of appearing like harassments of your debtor. When phone calls fail to deliver the desired results, you sent written demands for payment, which are useful if you have to file a lawsuit.
When the demand notes requesting for payment of the debt do not resolve the collection process, you would start considering the benefits of hiring a debt collection agency, if only to let the debtor know that you mean business and are serious about collecting the debt.
As a Small Business Owner, there are compelling reasons to outsource your collections, and factors to consider in your choice of an agency. Here are the main ones:
- Higher chance of recovery: Your decision to engage an agency implies that the debtor has refused and/or neglected to pay, in spite of your efforts to collect. Your phone calls and demand letters have failed, the account has become delinquent, and recovery is becoming doubtful. Knowing that the longer the debt goes unpaid, the less likely it will be paid, you have to exercise the option of handing the collection to an agency, as soon as possible, so that its expertise and advance tactics can give you a higher chance of getting paid, albeit at the price of losing a percentage of the debt as cost of collection.
- Cost of hiring an agency: When you reach a decision, a collection agency, not being a party to the original contract, will be assigned an account directly, without an upfront cost to you, the creditor.
There is no average rate for collection agencies. A collection agency typically charges a flat fee or a percentage fee, based on the type of collection, the amount to be collected and the volume of debts. Subject to giving you the choice to accept or decline, you will also pay legal fees and disbursements if the agency takes your case to court.
- Contingency pricing: Most collection agencies use contingency pricing. Their fees, including litigation costs and court fees, are usually charged after the recovery of your debt; on the basis of a contingent fee, or percentage of the amount owed and/or collected. This frees your cash flow for other uses and gives you peace of mind.
In a typical agreement between you and the collection agency, the agency will take a percentage of the debt it succeeds in collecting. The agency will not earn money until it collects the debt from the debtor. Depending on the type of debt, the age of the debt and the failed attempts you have made to collect it, the fee could range from 10 to 40 percent of the debt or whatever the parties agree.
- Customer Service: Your aim will be to select an agency that responds to your concerns. It is also helpful for you to research your target agency, and talk to some clients who have worked with, or are working, with the agency. The agency you pick must be reputed for good customer service, and be able to recover your funds without tarnishing the name of your company.
How do you narrow your choice of the best collection agency for your small business? Collection agencies use various processes in recovering delinquent debts; like tracking difficult debtors, including those who go out of town to avoid paying their debts; issuing formal demand letters as a first step of contact prior to further action; and initiating legal action against your debtor when preceding steps fail.
There are issues to consider when zeroing in on the collection agency that is right for your business. In searching for the best deal possible, you must seek answers to the following questions:
- What fee, if any, does the agency charge, over and above the percentage on the account?
- What discount, if any, does the agency offer, based on the amount to be collected?
- Would the agency offer, in case of litigation, a discount based on the amount to be collected?