Unpaid invoices affect cash flow and can disrupt operations. When internal efforts to collect on delinquent accounts prove unsuccessful, engaging a professional collection agency becomes a viable option. These firms specialize in recovering outstanding debts, allowing a business to focus on its primary activities rather than difficult collection pursuits.
When to Send a Debt to Collections
Deciding when to escalate an account to a collection agency requires careful evaluation. A common benchmark is when an invoice becomes 90 to 120 days past due. At this stage, the likelihood of successful recovery begins to decline sharply, and by six months, the probability of collection drops to just over 50%.
The debtor’s behavior is another strong indicator. If a client who was previously responsive suddenly stops all communication, it is a sign of unwillingness or inability to pay. Broken promises of payment are also a red flag; when a customer repeatedly fails to follow through on payment commitments, it suggests that further internal efforts will be unproductive.
A pattern of consistent late payments may also warrant escalating the matter. If a customer repeatedly disregards payment deadlines despite reminders, more decisive action may be needed. Similarly, if a customer is unwilling to cooperate in resolving a dispute, it could be a tactic to delay payment. When your attempts to find a solution are rejected, it is a signal to hand the account to professionals.
Preparing Your Documentation
Before engaging a collection agency, assemble a comprehensive file of all relevant documents. This preparation ensures the agency has the necessary proof to pursue the debt effectively and can streamline the collection process.
Your documentation should establish the legal foundation of the business relationship and prove your attempts to resolve the matter internally. Key items to include are:
- A signed contract or service agreement that establishes the legal foundation and outlines the payment terms the debtor agreed to.
- Copies of all original invoices sent to the debtor, which detail the specific charges, payment due dates, and any late payment terms.
- A complete communication log that records the dates and summaries of all calls, emails, and letters regarding the overdue account.
- The debtor’s most current contact information, including their legal business name, address, phone numbers, and email addresses.
- A copy of the final demand letter you sent, which shows you made a formal last attempt to collect the debt.
How to Choose a Collection Agency
Selecting the right collection agency can impact both your finances and your company’s reputation. It is beneficial to partner with an agency that specializes in business-to-business (B2B) collections. These agencies understand the nuances of commercial debt and often employ tactics that aim to preserve professional relationships.
A primary consideration is the agency’s fee structure. Most commercial collection agencies operate on a contingency basis, meaning they only get paid if they successfully recover money on your behalf. It is important to have a clear understanding of this percentage before signing any agreement.
Verifying the agency’s credentials is a necessary step. Ensure the agency is licensed and bonded, which provides a layer of protection for your business. You can also research their reputation by looking for online reviews or asking for references from other businesses in your industry.
When speaking with potential agencies, have a list of questions ready. Inquire about their specific collection process, how they handle disputes, and their reporting methods. Understanding their success rates with accounts similar to yours can also provide insight into their effectiveness.
What to Expect After Submission
Once you have submitted an account to a collection agency, their team will take over all communication with the debtor. The process begins with a series of letters and phone calls. These communications inform the debtor that the account is now with a third-party agency and press for payment.
The agency will handle all negotiations regarding the outstanding balance. This can be helpful if the debtor disputes the amount owed or claims to have financial difficulties. Collectors are trained to assess the situation and work toward a resolution, which may involve a settlement or a structured payment plan.
There are a few possible outcomes once the agency begins its work. The best-case scenario is that the debtor pays the full amount owed. Alternatively, the agency may negotiate a settlement, which you would have to approve. In some instances, the agency may be unable to collect the debt, especially if the debtor’s business has closed or filed for bankruptcy.
When the agency successfully collects funds, they will deduct their agreed-upon contingency fee from the payment before remitting the remainder to you. The timing and method of these payments should be clearly outlined in your service agreement. The agency should provide regular reports detailing the amounts collected and the fees deducted.
Understanding the Costs and Legalities
The most common fee structure for collection agencies is the contingency fee. This means the agency assumes the risk and only earns a commission on the funds they successfully recover. If they are unable to collect the debt, you do not owe them a fee. This payment model aligns the agency’s interests with yours.
Contingency fee rates can vary based on several factors, including the age and size of the debt. Older debts are generally harder to collect, so they often command a higher percentage. The fee is calculated as a percentage of the total amount recovered, and it is important to have this rate clearly defined in your contract.
It is useful to understand the legal environment in which B2B collections operate. While consumer debt collection is strictly regulated by laws such as the Fair Debt Collection Practices Act (FDCPA), these same rules do not always apply to commercial debt. This gives B2B collectors more flexibility in their methods.
Despite the different legal framework, a reputable collection agency will adhere to professional and ethical standards to protect your business’s reputation. Your contract with the agency should be clear and comprehensive, outlining the responsibilities of both parties. Choosing an agency that operates ethically ensures that your brand is not associated with overly aggressive or unprofessional collection tactics.