The most two common ways for collection agencies to charge for services is through a flat fee service or a contingency rate service.
A flat fee service is when the collection agency charges a set amount for each account placed with the agency. In contrast, a contingency rate is when the collection agency keeps a percentage of any payments collected.
How Much Does Collection Agencies Charge?
When a collection agency charges a flat fee service, they usually charge anywhere between $10-$25 per account. The amount charge depends on the number of accounts the business is placing with the collection agency. Typically, if a client has more accounts then the cost per account is lower as it guarantees the agency a certain amount of revenue.
When a collection agency sets a contingency rate for a client, the rate is dependent on the following factors:
- Debt Amount Owed: Simply put, the larger amount of debt owed equals a greater chance of higher revenue for a collection agency. Therefore, collection agencies will typically offer a better rate when a larger amount of debt is being placed with them.
- Age of Debt– If a debt is very old; a collection agency will estimate lower odds of successfully collecting the money. Furthermore, a debt that hasn’t been aged but for a few months typically increases the odds of collections. This will result in agencies charging higher rates for older debts and lower rates for more fresh accounts.
- Type of Debt– For most collection agencies, business to business (B2B) debt is preferable to collect. This is for several reasons but is a general rule of thumb across the debt collection industry. If you have B2B debt, expect to obtain a great rate. Collecting debts from individuals such as medical debts are more difficult which results in agencies charging higher rates.
- Conditions Surrounding Debt – Each debt collection situation is different and that can affect the rate being charged. For example, if the debtor is no longer in business or the debtor is disputing the amount charged due to unsatisfactory work delivered. If the conditions are negative around the debt, the agency will typically charge more to cover the lower probability of successful collections.
Contingency Rate vs Flat Fee
Which method a client chooses to be charged by a collection agency is very important. Both contingency rate and flat fee has pro’s and con’s.
If a business has a ton of small debts, such as fitness gym that has an average balance of $100 but has 125 clients past due then flat fee could be the best fit. A customer could pay $15 per account to a collection agency that will then work on collecting the debt for the gym.
On the other side of the coin, a logistics company that is owed by $10,000 by one client may be better off to pay a contingency rate. One benefit of hiring on contingency rate is the payout may be higher if the debt is collected in full.
Risk vs Reward
Each business has a different set of circumstances as we just shown above with the fitness gym and the logistics company. Both were owed a similar amount but the effort and skill involved into collecting each debt is much different. The fitness gym may need an agency to simply call the debtors as often as possible for a few months to see maximum results while the logistics company needs a skilled collector who understands negotiation.
Here at CollectionAgencyMatch.com, we typically suggest hiring a collection agency on contingency rate as it reduces your financial risk.
If your business has already lost revenue due to late payers then sinking more money at the chance of a collection agency collecting money for you should make you uneasy. Yes, they are certain instances such as a medical practice with 100’s of accounts that flat fee makes sense. Overall, contingency rate debt collections reduces the financial risk of the client by only having to pay when the agency collects the debt successfully.
Collection Agency Motivations
One risk of paying a collection agency upfront of a flat fee model is the agency may be less motivated to work hard to collect the debt. If a business decides to try the flat fee model, make sure you are hiring an experienced collection agency with a proven track record.
Hiring a collection agency based on a contingency rate will insure the agency will work as diligently as possible because they only get paid if the money is collected. The motivation is provided through this model because it is all performance based.
Illustration of How Contingency Rate for Collection Agencies Work
If your business needs help with debt collection, don’t hesitate to get a risk free, contingency rate quote today!