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When Should Freelancers Use a Collection Agency?

Ross Mudrick
Ross Mudrick

After exhausting all other options, freelancers can turn to collection agencies to help them collect on unpaid invoices.

  • If you’re a freelancer, it’s crucial to get paid — particularly when you’re just starting out — so you must have a plan for collecting unpaid invoices. 
  • Exhaust all other options, including clarifying payment terms and communicating clearly, before hiring a collection agency.
  • Consider hiring a collection agency if a client breaches your payment plan, payment is overdue by 90 days, the client owes you a substantial amount, or your client repeatedly fails to pay.
  • This article is for freelancers struggling to collect payments from their clients.

Freelance work, a product of the part-time economy trend, has skyrocketed as more companies turn to temporary contractors to fill position gaps. The U.S. has seen a vast increase in freelancers in recent years, with Statista estimating that half of all workers will be freelancing by 2027. 

While freelancing offers professionals freedom, flexibility and independence, collecting payments is a significant downside. With no accounting department at their disposal to create invoices and follow up on payments, the burden of debt collection falls on the freelancer. And with many freelancers waiting 30 days for payment, there’s little cushion for late payments and unpaid debts.

When customers don’t pay their bills, freelancers have options to pursue. However, if they’ve exhausted all their debt collection efforts, it may be time to hire a collection agency. We’ll explore collection agencies and what freelancers should consider before making this last-ditch effort to collect their money. 

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What is a collection agency?

A collection agency is a third party that, for a fee, will attempt to collect unpaid bills on your behalf. 

The best collection agencies take on the burden of seeking payment for your clients’ unpaid freelance invoices and debts. They use several strategies to get your money, including skip tracing, sending formal demand letters, and contacting the debtor by phone.

Additionally, a collection agency can add a “collection” status to your client’s credit report, potentially affecting their business credit score. This is a powerful ability, as lenders who see a collection status on a borrower’s credit report are significantly less likely to approve them for financing. Clients who fail to pay after a collection agency contacts them may face ramifications beyond their business relationship with you.

As a last resort, collection agencies can begin litigation proceedings to collect unpaid debts. The threat of being sued for an outstanding debt often prompts the debtor to pay up. 

Did You Know?

The best accounting software can help freelancers stay on top of invoicing and maximize cash flow. Read our review of Zoho Books to learn about an excellent accounting solution for freelancers.

When should you hire a collection agency?

Hiring a collection agency can be expensive and will almost certainly alienate the client. Ensure you’ve exhausted every other option before proceeding. 

It may be time to send someone to collections if any of the following situations occur. 

1. Consider hiring a collection agency if the client breached your payment plan.

Before agreeing to freelance work, set up a payment plan to ensure you and your client are on the same page. If the client violates the plan, you have grounds to hire a collection agency and fight for your money. Any legal document that a client signed and then broke will help your case for collecting the debt they owe you.

2. Consider hiring a collection agency if you’ve waited over 90 days for payment.

If you feel you’ve wasted too much time waiting for payment, it’s time to seek outside help. 

After an unpaid invoice reaches the 90-day mark, act immediately. This is typically the last straw for freelancers. After that point, the probability of collecting that debt decreases.

3. Consider hiring a collection agency if the unpaid invoices are worth more than the amount you’d pay a collection agency. 

You might not want to fret over an invoice that’s only a few hundred dollars. Sure, you shouldn’t let it slide anytime your clients fail to pay you, but sometimes it’s better to cut your losses and stop working with the client.

Collection agencies typically charge between 10 and 50 percent of the amount they collect. Ask yourself if investing in an agency that will take a percentage of your debt is worthwhile. For large invoices, the answer is probably yes. For smaller ones, it probably isn’t.

4. Consider hiring a collection agency if your client has a history of not paying.

If the person or business you’re working with has stiffed you on invoices before, consider enlisting an agency’s help. The client has established a behavior pattern at this point, and you shouldn’t have to deal with the fallout.

However, if this unpaid invoice is their first offense, hear the client out before you try to collect. Don’t assume the worst; they might have lost the invoice or fallen on hard times. You don’t want to lose a client’s business because of a simple miscommunication. If you follow up respectfully and they still refuse to pay or fail to respond, then it’s time to act.

What to expect when hiring a collection agency

Working with a collection agency isn’t always pleasant or inexpensive, so consider it a last resort. Once you’ve made the decision to hire an agency, here are the steps to take.

  1. Find a collections agency. Your first step is to find a collections agency that’s the right fit. Ask if they have experience working with companies of your size and whether or not they are licensed (most, but not all, states require them to be). Double-check with the Better Business Bureau and the Commercial Collection Agency Association to ensure they’re in good standing. Confirm that they’re insured so they, rather than you, will be liable if anything goes wrong.
  2. Brief your point of contact. Once you’re comfortable with the fit and you hire the company, speak to your point of contact. This person will need the details of the situation — what work was completed, when invoices and follow-ups were submitted, who’s responsible for payment, and if there’s a prior history of nonpayment. The process will be much smoother if you have this information organized.
  3. Understand the agency’s plan. After the agency understands the situation and confirms that debt collection laws are on your side, it will lay out a plan. You must be comfortable with this plan. The agency will likely start with a straightforward, lower-stakes approach, like a debt collection letter and phone calls. The nonpaying client may decide the situation isn’t worth the hassle and pay up. Some companies will escalate to more invasive techniques, but you don’t have to agree to anything you don’t feel comfortable with.
  4. Understand the agency’s fees and terms. Collection agencies can charge anywhere from 10 to 50 percent of the debt they collect. The difficulty of collecting the debt usually determines the percentage. For example, if the collection agency can collect on a debt by sending letters or making calls, the cost will be lower than if they resort to legal action. Some collection agencies require a minimum amount you are owed before they’ll help you. Others will help you recover debts as low as $50.

If you’re owed a significant amount, are dealing with large companies that owe you money, or need more legal assistance, consider hiring a debt collection attorney.

Options to consider before hiring a collection agency

Before you make the expensive and potentially alienating decision to send an account to collections, consider the following options:

  • Clarify the payment terms. Double-check your contract to confirm when and how you were supposed to be paid. This information will help ensure you’re correct and strengthen your case.
  • Keep good records. Keep a detailed list of when you sent the invoice and follow-up requests, and save every email. Though a phone call can apply pressure, create an accompanying paper trail by sending follow-up emails (“I am writing to confirm what we just agreed to on the phone…”).
  • Escalate your debt-collection efforts. Internal communication can sometimes be poor at a big company. Maybe the department you worked for doesn’t know the finance department hasn’t paid you, or the responsible manager doesn’t know you haven’t been paid. Send a polite but clear email sharing the situation’s precise details, and copy senior staff members. State that payment is owed and hasn’t been delivered within a reasonable timeframe. If an email doesn’t work, try a formal letter.
  • Do some mental math. If you’ve exhausted every other option, do some quick math about how much you’ll have to pay a collection agency and how much of your own time the process will take. Let it go if recovering the debt isn’t worth your time.
Did You Know?

All debt collection must comply with the federal Fair Debt Collection Practices Act (FDCPA). If you don’t comply, you and your agency can appear untrustworthy and give your debtor an advantage in the legal process.

An unpleasant but sometimes necessary solution

If you’re a freelancer, you can’t afford to work for free. While you should resolve unpaid bills through standard channels first, sometimes engaging a collection agency is necessary. This may damage the professional relationship, but clients who don’t pay reliably aren’t worth your time and effort. 

Sammi Caramela contributed to the reporting and writing in this article. 

Image Credit: AndreyPopov / Getty Images
Ross Mudrick
Ross Mudrick
Staff Writer
Ross Mudrick is a writer specializing in a range of issues including economic opportunity, community development, and arts and culture. He has written for dozens of organizations including the Trade Federation Office of Canada, New York City Economic Development Corporation, IMPACT2030, Realized Worth Institute, and He earned his bachelors from University of Wisconsin and his MPA from New York University. Ross is passionate about solidarity and teaching his daughter how to enjoy doing difficult things.