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