A collection agency recovers delinquent funds on behalf of a business. For a small business, unpaid invoices can disrupt operations, from meeting payroll to paying suppliers. Hiring a third-party collector is a significant decision, as the agency represents your company to customers. Choosing the right partner protects both your finances and your business’s reputation.
When to Hire a Collection Agency
Engage a collection agency only after your company’s internal collection efforts have been exhausted. If an account is 90 to 120 days past due, it is time to seek professional assistance. The probability of collecting a debt decreases significantly as time passes, so waiting too long is counterproductive.
Before transferring an account, a business should complete a series of internal actions. This process includes sending multiple invoices and reminders, followed by direct phone calls to the customer. If these attempts fail, the final internal step is sending a formal demand letter that states the outstanding amount and a final payment deadline.
When these methods fail, it is time to hire an agency. At this point, the resources your team spends chasing payment likely outweigh the benefits. Outsourcing the task allows your staff to focus on core business activities rather than debt recovery, which is a specialized skill.
Finding Reputable Agencies
Begin your search by seeking referrals from professional contacts like your business attorney, accountant, or other business owners. Their direct experiences can provide valuable context that online searches alone cannot. These recommendations often lead to agencies that are already vetted to some degree.
You can also consult directories from professional organizations like ACA International, which lists member agencies that uphold a code of conduct. Targeted online searches for agencies specializing in your industry, such as commercial or medical collections, can further refine your list.
With a preliminary list, verify that each agency is licensed to operate in your state and in the states where your debtors reside. Many states also require agencies to be bonded, which provides financial protection for clients. This screening will help you create a shortlist of three to five agencies to investigate further.
Key Factors for Vetting Agencies
When vetting an agency, your evaluation should focus on several areas. The first is adherence to the law. An agency must comply with all federal and state regulations to protect your business from legal complications.
A primary regulation is the federal Fair Debt Collection Practices Act (FDCPA), which dictates how collectors can contact debtors, prohibiting harassment, false statements, and other unfair practices. Although the FDCPA regulates third-party collectors, your business can be held liable for an agency’s illegal actions, making their compliance your responsibility.
Another factor is the agency’s fee structure. The most common model is a contingency fee, where the agency retains a percentage of the amount it collects, often between 15% and 50%. For example, a newer debt might have a 20% fee, while one over a year old could be 40% or higher. This model aligns the agency’s interests with yours, as they only get paid if you do.
A less common model is a flat fee per account, which can be cost-effective for a high volume of small debts. It is important to ask for a clear explanation of all potential charges. Be sure to inquire about additional fees for services like skip tracing—locating a hard-to-find debtor—or legal action.
Inquire about the agency’s collection process and reporting methods. Ask for specifics on their communication tactics and how they maintain a professional tone to protect your brand. A reputable agency will be transparent about its approach and provide regular performance reports detailing all actions taken on your accounts.
Finally, consider the agency’s experience in your industry. An agency specializing in commercial (B2B) collections understands business relationships differently than one focused on consumer debt. Industry experience often translates to a higher recovery rate because collectors are familiar with the sector’s common challenges. An agency with a proven track record in your field is better equipped to navigate those circumstances.
Preparing for the Partnership
Once you select an agency, you must formalize the partnership. This begins with a careful review of the service agreement or contract. This legal document outlines the terms of your relationship, so understand every clause before signing, paying close attention to the fee structure.
The contract should define the process for handling disputes and the terms for terminating the partnership. A clear exit strategy is an important component of any business relationship. If any part of the agreement is unclear, ask for clarification or have your legal counsel review it before signing.
With a signed contract, gather and organize all documentation for each delinquent account. This preparation ensures the agency has the information it needs to begin its work promptly and effectively. Key documents include:
- Copies of the original signed contract or customer agreement.
- A complete set of all unpaid invoices.
- Detailed account statements showing the history of charges and payments.
- The debtor’s last known contact information (full name, address, phone, email).
- Records of previous correspondence regarding the debt.
Common Red Flags to Avoid
When vetting agencies, it is important to recognize warning signs. Red flags can indicate that an agency is disreputable, ineffective, or fraudulent. Avoiding them can protect your business’s reputation and finances.
A primary red flag is any guarantee of success. Professional agencies know that not all debts are recoverable and will not promise a 100% success rate. Also, be wary of agencies that use aggressive sales tactics on you, as this may reflect how they will treat your customers.
An agency’s professionalism should be evident in its operations. A lack of a professional website or a verifiable physical address is a concern. Be cautious if an agency provides vague answers about its collection process, legal compliance, or fee structure, as transparency is the mark of a trustworthy partner.
Finally, scrutinize an agency’s credentials and fee requests. A reputable agency will provide proof of its licensing and bonding, as well as client references. Be cautious of any agency that demands large, non-refundable upfront fees for a contingency-based service, as this is not standard for the model and may indicate a scam.