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Customers Won't Pay? How to Choose a Collection Agency

A collections agency can help you recover debt when a customer won't pay.
Credit: photastic/Shutterstock

Collection agencies are focused on recovering debts that are past due. These companies often reach out to your unpaid accounts in a number of ways, including by phone, in writing and via email. In extreme cases, they may seek legal recourse on behalf of your company. And the method works – collection agencies are responsible for tens of billions of dollars recouped every year.

While there are many reputable collection agencies, there is a reason the industry has earned a bad rap. Some agencies rely on unscrupulous, harassing or illegal tactics to collect, and that's something to avoid at all costs, because it reflects poorly on your business. There are strict laws surrounding collections efforts, and any reputable agency will follow them.

Many people confuse collection agencies with debt buyers, although there are distinctions between the two. Debt buyers purchase debt for a reduced price — sometimes pennies on the dollar — and keep all the money they collect. Collection agencies, on the other hand, are paid a percentage of any outstanding debt they recover, but they don't own the debt. When they collect a debt, they hand the money over to your company, minus a certain percentage in fees.

If you've hired a collection agency, it is important to do your research first to understand what separates the good ones from the bad. It is also important to find a collection agency that is experienced, professional and familiar with your industry. Not every collection agency will be a good fit.

Editor’s Note: Looking for a collection agency for your business? If you’re looking for information to help you choose the one that’s right for you, use the questionnaire below to have our sister site, BuyerZone, provide you with information from a variety of vendors for free:

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Most companies send accounts to a collection agency when they are between 90 and 120 days past due. If you wait longer than that, you're far less likely to recover the debt. The more time that passes, the lower the chances. Generally, it's time to start thinking about hiring a collection agency if:

  • New customers do not respond to your first attempt to collect the debt. When you do not have a history of transactions with the customer, there's a greater chance they will refuse to pay.
  • You've agreed to a payment plan, but the customer does not follow through. Customers who still won't pay after you've agreed to meet them halfway with a payment plan are unlikely to change their minds.
  • A customer completely denies responsibility for the debt. Without a collection agency, these debts are rarely recovered.
  • The customer makes unfounded complaints about your business, product or service as an excuse not to pay. Most of the time, these complaints are just an excuse to get out of paying the debt.
  • The customer has a long history of being financially irresponsible.

Once you've exhausted your options and aren't getting anywhere with a customer on your own, the debt is better left in the hands of a professional agency that may recover at least a portion of what you're owed, if not all of it.

There are more than 4,000 collection agencies in the United States alone, and not all are alike. Some handle consumer accounts, while others specialize in business-to-business (B2B) collections, also known as commercial collections. The biggest firms often handle both.

Some collection agencies specialize in certain industries, such as medical, insurance, utilities, credit cards, mortgages or auto loans, while others work for a number of industries. There are agencies that cater to businesses of certain sizes (small business versus large corporation) as well as by region (local or national). Beyond basic collection efforts, some agencies provide additional services such as billing, telemarketing, accounting or business administration.

It is important to hire an agency with an established track record of successful collections in your industry. The agency needs to be familiar with the terminology in your industry, and the rules or regulations set forth by state or federal agencies governing your industry, if applicable. If you're in the medical field, for example, the agency needs to be well versed in insurance requirements, medical terms and important laws like HIPAA.

If you have consumer debt, find an agency that specializes in consumer debt. If you have business customers, choose one that specializes in B2B. If you have both types of debtors, consider dividing the debts between two collection agencies for more focused efforts and better results.

The hardest part of choosing a collection agency is narrowing down the search from the thousands of options. Here are some practical tips to help you get started.

  • Ask for referrals from your attorney, accountant or trusted business associates in your industry. Go beyond just asking for agency names and find out why the person is recommending that particular agency. Does it have a high success rate? Are they known for strict adherence to laws?
  • Search the ACA International directory to find a member agency licensed in your city or state. ACA International, the Association of Credit and Collections Professionals, is a nonprofit that establishes ethical standards for the industry and requires its members to adhere to them.
  • Check the Better Business Bureau for ratings on any collection agency you are considering. One or two complaints can be a fluke, but multiple complaints are a major red flag.
  • Make sure the company is state licensed and/or bonded, if applicable. Many states require one or both.
  • Find out where the agency is licensed. If you only do business locally, an agency that is licensed only in your state is just fine. If you have customers across the country, find an agency that is licensed in all states that require it.
  • Find out if the company is insured. Errors and omissions liability insurance (E&O) is often a sign of a reputable agency. E&O insurance provides coverage for claims brought by consumers for improper conduct such as harassment or slander. In many cases, that coverage is extended to your business. While E&O insurance is not required by any federal or state laws, it's a sign of good faith.
  • Visit the collection agency. Before you commit, sit down with the collection agency to learn more about them. There's a lot you can tell about whether the agency is reputable and a good fit simply by talking to them. Ask to see proof of results – what percentage of debts have they successfully collected? Find out which tactics and technologies the agency uses in its collection efforts. Ask for references, and take the time to check them. If the company doesn't seem like a good fit, trust your instincts and move on.
  • Don't worry too much about size. A large, national firm is not necessarily a better fit than a small, local one. It depends on your needs, the agency's strengths, its reputation and its track record.

When choosing a collection agency, integrity and reputation are among the most important considerations. Never choose a company with questionable standards, even if the company gets results.

Developing a reputation for illegal and harassing methods of debt collection can damage your reputation, costing you current and future customers. In worst-case scenarios, your company can face litigation for a collection agency's illegal practices, even if you were not aware of its actions.

All consumer collection agencies are required to comply with a federal law regulating the industry known as the Fair Debt Collection Practices Act (FDCPA). It's important you know the law so you can hire a collection agency that abides by its precepts.

Under FDCPA, collection agencies:

  • Cannot call debtors before 8 a.m. and after 9 p.m. unless the debtor has agreed to it beforehand
  • Cannot call at inconvenient places; for example, if the debtor has requested to not receive calls from collectors at work, collectors can no longer call a debtor's employer
  • Must honor letters requesting that contact concerning a debt cease
  • Must contact a debtor's attorney if the debtor has one
  • Cannot contact third parties (including family and friends) more than once. They can only contact the third party to find a way to contact the debtor
  • Must send validation and verification of debt
  • Cannot threaten harm or violence
  • Cannot threaten garnishment or seizure of property or other legal action unless actually intending to take action (and legally allowed to take that action)
  • Cannot make false statements, such as that the debtor has committed a crime or that the collector is an attorney
  • Cannot send documents that look like court or legal documents but aren't

It's important to note that FDCPA only applies to consumer debt, not debt that someone accrued while running a business.

Many, but not all, states require collection agencies to be licensed and/or bonded. Always find out what your state requires, and check to find out whether the collection agency you're considering is compliant. While membership to ACA International is not mandated in any way, you're always better off hiring an agency that has it, because it means it has been vetted.

If you're dealing with commercial or B2B debt, look for a collection agency certified by the Commercial Law League of America (CLLA) and a member of the Commercial Collection Agency Association (CCAA). Like ACA International, both require commercial collection agencies to follow a strict code of ethics, to follow proper accounting principles and to be bonded. The CCAA, for example, requires a $300,000 bond, trust funds and a strong code of ethics.

Aside from the lack of proper licenses and certifications, there are red flags that can alert you that an agency may not be reputable. Past lawsuits should give you pause, and it's usually easy to find out about them with a simple Google search.

There are many factors that determine collection agency fees, including the size of the debt portfolio, the type of work required to collect the debt, the age of the account, the agency's experience and more. Most collection agencies have some type of tiered pricing structure, and most charge only when they collect.

Fees charged as a percentage of the collected debt are known as contingency fees, and are negotiable. Typically, they range anywhere from 10 to 50 percent, depending on the size of the debt.

Keep in mind that the lowest rate doesn't always mean the best results. The return rate is what's really important. If you pay a 25 percent fee on $1,000 worth of debt and the agency collects only $300 of that, your return is $225. However, if you pay 35 percent to an agency that collects $500, you reclaim $325.

In some cases, although far less often, a collection agency will charge a flat fee for its services. Typically, an agency will only agree to do this if the debt is less than 90 days old – otherwise known as precollection – or just over 90 days.

The best collection agencies have the proper tools and resources in place to ensure they see the highest returns, including technologies, partnerships with other agencies and attorneys, and a highly skilled and trained staff.

Technologies to look for include:

  • Skip-tracing services that are used to locate customers who are hard to find. Typically, these are databases that allow collection agencies to find debtors who have moved without leaving a forwarding address.
  • Digital technologies that go beyond just phone calls and snail-mail letters, allowing customers to negotiate payments or file a dispute online. These appeal to younger debtors and people uncomfortable discussing their debt with collection agencies over the phone.
  • Algorithm-based collections processes that tailor strategies to the debtor. This allows collection agencies to build a profile in order to better understand the customer and the right way to approach them. Often, email is the first form of communication versus a formal letter.
  • Online access that allows you to monitor the status of accounts, communicate with the agency and run reports on the status of your collections. This is especially helpful if you have a large number of accounts with the collection agency. It allows for real-time information rather than waiting around for weekly or monthly status reports.

Properly trained collectors are also crucial. You want to select a company whose employees are experienced and skilled negotiators. Find out if the collection agency's employees receive regular education and training. Courses are available through ACA and other membership organizations. If possible, arrange to listen in on a few calls before committing to a collection agency.

Beyond just choosing a collection agency, you'll need to put some effort into managing the relationship over time. You want a collection agency that works like a partner, not just a contractor. The agency should be willing to meet face to face periodically to review the status of your accounts, and they should promptly return phone calls and emails – ideally within one business day.

There's work to do on your end, too. To promote the highest possible returns, you should provide the collection agency with as much information about the debtors as possible, including:

  • Names, addresses and telephone numbers
  • Cellphone numbers and email addresses
  • Names of the debtor's spouse, friends, relatives and neighbors
  • Information about whether the debtor has responded to your debt collection efforts, and if so, how
  • Details about the purchase or transaction, including the date
  • Any paperwork related to the transaction, including contracts and credit applications
  • Nicknames, maiden names and aliases

 Although you are paying a collection agency for their experience, judgment and expertise, the agency can better do its job when you provide as much information as possible. The more information the agency has, the more money you collect.

Below is a list of collection agencies available to collect debts across the United States. Business News Daily only listed vendors with accreditations from organizations like the BBB, ACA or another similar organizations.

We considered BBB ratings in our evaluation, and looked at the number and quality of complaints against each company. We mainly considered complaints filed by businesses that hired the agencies, and not from debtors, though some debtor complaints were considered and thoroughly researched if there were recurring reports of illegal collection practices.

Aargon Collection Agency – Aargon has offices in Nevada, Hawaii, Florida, Colorado and Missouri, but it collects debts nationwide. It combines technology with debt recovery strategies to all industries, though it has specialized services for medical debt and utility company debt. This collection agency has its own compliance department to ensure compliance with federal and state laws, including FDCPA. Aargon.com

Account Management Systems – AMS collects commercial debts. Based out of Tampa Bay, this debt collection service collects debts nationwide, charges no upfront or sign-up fees, and only collects money if they collect your debts. Amscollects.com

Aspen National Collections – Aspen National Collections works with the timeshare, education, municipal and utility industries to collect outstanding debts. It creates debt collection strategies tailored to each company it works with. This agency's website has an online portal so that clients can login and check their accounts to see the progress being made on their past-due accounts. Aspennational.com

Client Services Inc. – CSI combines roll-rate and liquidation results and technology like voice analytics software to ensure compliance with collection laws. It is PCI-DSS compliant and has several safety certifications.  In addition to collection services (pre charge off), it also offers recovery services (post charge off). Clientservices.com

CollectionCenter, Inc. – CollectionCenter, Inc. has offices in Wyoming, Colorado and Utah. It offers precollection and bad debt collection, litigation, online account access, health care payment system and more. Debtors can make payments over the phone, via mail or online. Mycollectioncenter.com

Credit Management Company – Founded in 1966, Credit Management Company recovers debts for government, health care, higher education, financial services and commercial businesses. It has an online system for debtors to make payments. In addition to collection services, it also offers claims resolution services. Creditmanagementcompany.com

Debt Recovery Resources – This is a full-service debt collection agency that not only helps recover debts but can help its clients improve internal debt collection processes. Debt Recovery Resources can manage accounts receivable, perform free legal background checks, search and find debtors, and more. Debt-rr.com

Firstsource Advantage, LLC­ – Firstsource works with health care providers, credit card issuers, universities and financial institutions to collect debts that are past due, and is a global top 20 collections service provider. This collector uses technology, internal audits, legal oversight, regulatory compliance and other methods to collect debts. Firstsourceadvantage.com

National Association of Credit Management – The NACM is an advocate for financial management and business credit professionals, and it also has its own collection service. Collections begin with contact that demands full payment. Phone call intensity increases as time goes by until debts are collected. NACM can also contact its affiliates to connect with bonded attorneys to work toward retrieving your debt. Nacm.org

Nationwide Credit & Collection, Inc. – NCC focuses primarily on health care finance collections and offers many services, including past due and final notice letters, payment plan management, credit bureau notification, legal action (if necessary), Medicare bad debt and more. Debtors can make payments toward their account online and can request verification of debt on NCC's website via its ecomply form. Ncc.us

Prestige Services, Inc. – PSI is available nationwide to collect commercial debt. It's been in business over 20 years, and its staff has over 50 years of collective experience. It provides professional skip-tracing to help locate debtors, and it can investigate businesses. If the debtor won't pay even after all of PSI's efforts, the agency can forward the account to an attorney in the debtor's area. Psicollect.com

Progressive Financial Services, Inc. – With offices in Pennsylvania and Arizona, Progressive Financial Services, Inc. works across the United States to collect debts. This agency focuses on mediating with debtors rather than confronting them, and works to find a solution for all parties involved in the debt. Progressive provides secure file transfer so that debtors can upload important documents related to their debt. Progressivefinancial.com

Recovery Solutions Group – RSG collects commercial debts. In addition to its substantial national attorney network, it employs private investigators to handle business accounts. It can collect debts in the U.S. and internationally and manages accounts receivable. It specializes in HOA assessment fee recovery and fire and water debt recovery. Rsgcollect.com

Revenue Assurance Partners – This solution customizes its service to your business. You can outsource as many or as few internal processes as you want, and Revenue Assurance Partners will work with you. This company has over 50 years of experience collecting past-due accounts. It also provides auditing, reporting, legal forwarding and other collection services. Rapcollect.com

Rocket Receivables – This debt recovery agency supports small- and mid-sized businesses. It offers fixed-fee pricing and a guarantee that you'll make double the money you invest in the agency. A more advanced service is available on debts that are more than 120 days delinquent. These are contingency collections, meaning that you'll split the recovered funds 50/50. Rocketreceivables.com

Transworld Systems – Servicing the medical, dental and education industries, Transworld Systems provides services with collections, loans, billing and analytics. Full-service efforts range from asset investigation to legal action. It has contingency pricing, meaning that if the debts aren't collected, you don't pay the agency. Tsico.com

Tucker, Albin & Associates – This collection agency has a network of over 500 private investigators and attorneys to help with debt collections. These services are available across the globe. It only collects commercial debts, not consumer debts. Tuckeralbin.com

VeriCore – This international collection agency focuses on recovery, reporting and remittance. It claims to have recovered debts on every continent and has the ability to report companies to the U.S. Embassy and the Commerce and Trade Division of the U.S. Government. Services are available in over 130 languages via interpreters. Vericore.com

Your Collection Solution – This collection agency collects consumer and commercial debts. It only collects a fee when they collect a debt. Though headquartered in Florida, Your Collection Solution can follow up with debtors located across the United States and in several other countries. This debt agency's management team has over 30 years of experience in the industry. ycscollects.com

Additional reporting by Ashley Smith.

Jill Bowers

Jill Bowers is a technical writer by day and a fantasy author by night. She has more than 10 years of writing experience for both B2C and B2B content, focusing on topics like travel writing, consumer finance, business marketing, social media marketing and other business categories. She spends an inordinate amount of time singing love songs to her dog, composes handbell music and writes YA fantasy novels.