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When Should Freelancers Use a Collections Agency?

When freelancers should hire collections
Credit: Stephen VanHorn/Shutterstock

Freelance work is becoming more common, with many pursuing it as a full-time career. But with the nature of this industry, there can be downsides, some as serious as not getting paid for your work.

For those who count on their freelance paychecks to pay the rent or cover necessities each month, missing even just one payment could be detrimental to their financial health. Missing multiple payments, however, could harm one's credit score and negatively affect cash flow.

Thankfully, there are collection agencies for when these issues get out of hand. These debt collectors, however, should not be a first-resort solution. Hiring a collections agency will likely result in the loss of your client, and there are many risks and downsides of doing so.

Unless you've hit a wall with a non-paying client and have the law on your side, you should wait until you are certain that a collections agency is your only hope. Here's how to know you've reached that point.

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Before agreeing to do freelance work, set up a payment plan to ensure you and your client are on the same page. That way, if the plan is violated, you have grounds to hire a collections agency and fight for your money.

L. Burke Files, CACM, DDP, president of Financial Examinations and Evaluations Inc., said you should consider choosing an agency if "you have a clear written agreement, including the choice of law for settling disputes." Any legal document that was signed, then broken, by a client will help back your case to collect any debts.

If you feel you are wasting too much time waiting, don't hesitate to seek help, said Files.

Specifically, if an unpaid invoice reaches the 90-day mark, act immediately. After that point, the probability of collecting that debt only decreases. It's typically a "last straw" for most freelancers.

Don't fret over an invoice that's only a few hundred dollars. Sure, you shouldn't let it slide any time your clients fail to pay you, but you must weigh your options.

According to Investopedia, collection agencies typically charge 25 to 45 percent of the amount collected. Ask yourself if it's worth investing in an agency that will take a percentage of your debt. For large invoices, the answer is probably yes. For smaller ones, you might want to simply move forward and no longer do business with that client.

If the person you're working with has done this before, consider enlisting the help of an agency. Odds are, there's a pattern to their behavior, and you shouldn't have to continue dealing with it.

But, if this is their first offense, speak with them about it before seeking outside help. Give them time and hear them out. You don't want to lose business because of a simple miscommunication.

Sammi Caramela

Sammi Caramela has always loved words. When she isn't working as a Business News Daily and Business.com staff writer, she's writing (and furiously editing) her first novel, reading a YA book with a third cup of coffee, or attending local pop-punk concerts. The only time Sammi doesn't play it safe is when she's writing. Reach her by email, or check out her blog at sammisays.org.