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

Customers Won't Pay? How to Choose a Collection Agency
Credit: chrisdorney/Shutterstock

Sometimes there are customers who just won't pay up. Your phone calls might go unreturned as the unpaid invoices pile up, or you might get excuse after excuse as to why payments are late, with a promise that they'll be coming soon. But when enough is enough, your business will likely have to partner with a collection agency to track down the money you're owed.

Collection agencies are focused on recovering debts that are past due, typically within a few months. These companies will often reach out to your unpaid accounts in a number of ways, including by phone, in writing, and via email. In extreme cases, they'll often seek legal recourse on behalf of your company. And the method is effective; collection agencies are responsible for tens of billions of dollars in collections every year, and 2017 will certainly be no different.

Good collection agencies are effective in recovering debts because they understand which tactics and strategies are most effective. They have tools and technologies to help them locate people who have moved or changed phone numbers. Beyond just basic collection efforts, some agencies also provide billing services such as processing, coding, printing and mailing. Some also provide telemarketing, accounting or business administration services. 

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

If you've decided to hire 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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When to hire a collection agency

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 or never intended to. 
  • 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 is going through a serious personal situation such as a divorce. Often, one spouse blames the other for the debt. A collection agency will be able to get to the bottom of who's responsible. 
  • The customer has a long history of being financially irresponsible. 

Deciding when to hire a collection agency is a personal choice, of course. But once it becomes clear you've exhausted all your options and aren't getting anywhere, the debt is better left in the hands of a professional agency. It is better to recover some portion of the debt than none of it. 

Choosing a collection agency

There are more than 5,000 collection agencies in the United States alone, and not all are alike — far from it, in fact. Some handle consumer accounts, while others specialize in business-to-business (B2B) 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 specifically to small businesses and those that cater to large corporations. Some agencies are local or statewide in focus, while others are national firms. 

Generally, it is important to hire a collection agency that has 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 and medical terms. 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. 

Still, for many small businesses, the hardest part of choosing a collection agency is narrowing down the search from the thousands of options. Here are some practical tips that will help you get started.

  • Ask for referrals from your attorney, accountant or trusted business associates in your industry. Referrals are extremely valuable if they come from a person you trust. Go beyond just asking for agency names and find out why the person is making that recommendation. Does the agency have a high success rate? Are they known for strict adherence to laws? 
  • Search the ACA International directly to find a member agency that is 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 a slew of complaints should be 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 also 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. 

Integrity, standards and legal issues

When you're 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 the 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). The law was created to end deceptive, abusive and unfair debt collection practices. It prohibits a long list of tactics, including threats, abusive language, revealing the nature of debts to third parties such as family members or co-workers, calling outside of approved hours, failing to cease communication upon request and more. Collection agencies that violate these rules are subject to loss of license and/or hefty fines — sometimes hundreds of thousands of dollars. However, the law does not apply to commercial agencies. 

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 that is 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, audits an agency's financials every two years and requires a $300,000 bond. 

Aside from the lack of proper licenses and certifications, there are red flags that can alert you the fact 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. Unrealistic claims should also be a red flag. Generally, no more than two-thirds of debts are recovered in the collections process, and often the percentage is lower. Be suspicious of any company that tells you differently. 

Fee structures

There are many factors that go into collection agency fees, including the size of the debt portfolio, the type of work required to collect, 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. 

Many people confuse collection agencies with debt buyers, although there are distinctions between the two. Collection agencies 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. Debt buyers, on the other hand, purchase debt for a reduced price — sometimes pennies on the dollar — and keep all the money they collect. 

Fees charged as a percentage of the collected debt are known as contingency fees. These can range from as little as 10 percent for large debts that go into collections early — when the likelihood of collecting is much higher — to 50 percent or more for smaller, older and subprime debts. The average contingency fee is closer to 25-35 percent. At 25 percent, for example, you would collect $775 on $1,000 worth of recovered debts. 

What many business don't realize is that contingency fees can be negotiable. Particularly if you have a large amount of debt to be collected, you can attempt to negotiate a lower rate. Don't accept the first rate that is offered without countering. Because there are so many collection agencies from which to choose, you should also compare rates among several. However, 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 case, although far less often, a collection agency will charge a flat fee for their services. Typically, an agency will only agree to do this if the debt is less than 90 days old — otherwise known as pre-collection — or just over 90 days. 

Technology and training

The best collection agencies have the proper tools and resources in place to ensure that 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 that 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 to people who are 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, an email is the first form of communication, rather than 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. 

How to work with your 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 how — or if — the debtor has responded to your debt collection efforts.
  • Details about the purchase or transaction, and 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 with as much information as possible. The more information the agency has, the more money you collect. 

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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