Tips to Hire a Collection Agency

When starting a new business, an entrepreneur’s focus is mostly on marketing and customer service. While generating sales is always important, knowing what to do when customers fall delinquent in paying an invoice is essential to maintaining healthy cash flow for a small business.

If a business provides product or services on credit, they are always the chance that the customer will fall behind. The reasons why customers do not pay on time is too long to explain in one article but between receiving bad checks and broken promises, small businesses will eventually run into past due customers.

Many business owners do not have a plan for how to collect a past due invoice, leaving them frustrated and searching for answers. While it is strongly suggested that small businesses pursue a delinquent customer, many times the results will fall far short of a full payment. When it is determined the payment is not coming in, hiring a collection agency is the next step to take.

Why should a small business hire a collection agency?

A small business with past due accounts on the book has two choices. They can write off the debt as a loss or they can hire a collection agency to pursue the debt and recover payment. While the process of hiring a debt collection agency may seem complicated, it is can actually be very simple and carry many long lasting benefits to a company’s balance sheet.

The benefits of utilizing a collection agency are the following:

1. Increase Cash Flow– Receiving a check in the mail from a collection agency who negotiated payment from a customer that was thought to be a bad account is the top benefit to bringing in a third party collection agency.
2. Focused Resources– A business owner has to wear many hats. One minute you are working on marketing, the next you are on the phone providing customer service. Chasing after past due customers who have wrote bad checks or promised to pay is not going to help your business grow. Focus on growing your business and delegate the debt collection task out.
3. Accounts Receivable Strategy– When the accountant brings attention to several past due accounts, hiring a collection agency will help with those old delinquent accounts. Furthermore, a professional collection agency can also help implement a strategy on placing future delinquent accounts into collections which will result in a higher amount recovered.
4. Retaining Customers– Sometimes customers fall on hard times. If a company writes off a past due account, they typically refuse to do business with that customer in the future. By hiring a collection agency, a company can collect payment and retain the customer for future business.

The process for a small business using a collection agency is simple. We have included an infographic below to display visually how debt collections works in 6 easy steps.

How to Hire a Collection Agency

Once a small business has realized they need to use a collection agency, they often ask “how do I hire a collection agency’? The process can seem overwhelming as many companies have no idea where to start. Below we have listed key steps on how to hire collection agency.

1. Initial Contact– Most small business owners will go online to research potential collection agencies that can assist them in recovering the money owed. You can e-mail or call any collections agencies and explain to them why you need a collection agency.
2. Licensed Collection Agency– Using a licensed collection agency is essential to reduce liabilities for your own business. Verify the agency is licensed to collect debt within the state you are located before moving forward with hiring the agency.
3. Ask about Cost– Some agencies will charge upfront fees before any collection efforts even begin. Reputable collection agencies are willing to work on a contingency rate basis which means they only get paid a percentage of money successfully collected. Verify the cost before you sign any contracts.
4. Read Contract– Read the contract thoroughly before you sign off to hire a collection agency. Make sure you are comfortable with the terms within the contract as the agency you will be hiring is representing your business and the reputation you have earned.
5. Place Accounts– Once you have agreed to the terms of the contract, place the accounts with the collection agency to allow them to go to work in recovering the money owed to your business.

How do I know I am hiring the Best Collection Agency?

You have worked hard to build your business to where it is today. When you decide to bring on someone to help represent your business, you need to make sure they are reputable and will work in a manner that will make your business proud.

Many collection agencies will claim to have the highest success rates in the industry. While some collection agencies are better at recovering debt than others, the truth is often times most agencies have around a similar recovering rate.

While collecting the money owed is the most important to your business, you should consider some other items when choosing a collection agency to hire.

• References– If you hire a new employee, you ask for references. Hiring a collection agency for your small business is no different. Ask for references from clients they have represented in the past. A quick conversation with a client of the agency will be very informative.
• Industry Expertise– If you run a construction company, hiring a collection agency that specializes in fitness gym debt collection is not going to yield the best results. Make sure the agency has references in the industry that proves they are a top construction collection agency. If they have successfully collected within your industry before, who is to say they cannot do it again?
• Online Reviews– Understand, many debtors will leave negative reviews to collection agencies online. Look for reviews left by actual clients who they represented. Did the agency pay out as agreed? How was communication and customer support?

Once you have completed your due diligence, take all the information you have gathered and make informed decision. All collection agencies are not created equal. The information gathered will help you make a solid decision for which collection agency you hire.

How much should a collection agency charge?

So far we have covered the benefits of using a collection agency and what steps to take while hiring a collection agency. The first question asked by most businesses is, “How much does a collection agency charge”?

Most reputable collection agencies work on what is referred to as a contingency rate. A contingency rate means the collection agency is only paid when they are able to successfully collect on a debt. If they don’t collect anything, then there is no charge.

This motivates a collection agency to work hard to collect the money your business is owed. If you pay them upfront, what reason do they have to work hard?

Here is an example of how contingency rate debt collection works.

Green Grass Landscaping company hires a collection agency to collect on the past due accounts.

They have 5 accounts past due, for a total of $4,000. The accounts have been past due anywhere from 6 months to over a year since the services were performed.

The $4,000 worth of past due accounts are placed with the collection agency who agrees to collect on a 30% contingency rate.

Over the next 30 days, the agency works diligently to collect on the 5 accounts.

They were able to secure payment from 3 accounts, which resulted in total payments of $2,200.

Green Grass Landscaping will receive a check from the collection agency for $1,540 as they will get 70% of the payments successfully collected.

The collection agency will keep the remaining 30%, which equals $660.

The collection agency will continue to work on the other 2 accounts that have yet to pay. The landscaping company will have $1,540 to put back into the business to help it grow in the future.

In the example above, the agency was able to $2,200 of the $4,000 placed with them. This is an excellent success rate and they were able to offer the services at a fair rate of 30% contingency.

What if a collection agency B offered a 15% collection agency?

That would be twice a better deal, right?

Actually, that isn’t always the case. You hired collection agency B that mostly collects on medical debts but they were eager to gain a new client and offered a low rate of 15%.

They have never collected in the industry before, the debt collectors struggle to negotiate with the debtors as they have never collected from customers who refused to pay for lawn care services.

They collect from only one account, for a total of $500.

Collection agency B keeps 15% which comes out to $75 leaving Green Grass Landscaping with $425 in revenue.

The landscaping company hired the agency who offered the lowest contingency rate, but it cost them $1,115.

The lesson being, hiring the cheapest can be a costly mistake in the long term!

Have I waited too long to hire a collection agency?

Many times small business owners will contact collection agencies with one account, that is only a few months past due. They are frustrated and decide to hand the account over to the collection agency.

Many times if they look back through book keeping records, they will find several other customers who have refused to pay or wrote bad checks. They thought it was too far in the past to pursue but they do not understand that collection agencies will collect on any age accounts!

Even if the account is over a year old, collection agencies will gladly take on the older accounts despite the challenge ahead.

Remember, the longer you wait until placing accounts with a collection agency, the less likely they are successfully collect payment.

In the future, create a plan going forward to place all delinquent accounts with the agency at 30 days past due. You will notice much higher recovering rates when you implement a plan with a debt collection agency and allow them to work on the past due accounts sooner rather than later.

Does the collection agency need to be in my city or state?

Supporting local businesses is great but that isn’t always the best choice for hiring a debt collection agency. You can probably find a local collection agency, but they may not have the resources or experience of collection agencies within the CollectionAgencyMatch network has.

The main consideration is that the collection agency is licensed to collect in the state you operate. Many states require debt collectors to pay a fee to be licensed to collect debt legally. You should verify this before hiring the collection agency because you do not want to get sued for using an unlicensed collection agency after they are caught violating FDCPA.

Besides, collection agencies aren’t doing face to face collections any longer. Hiring local has no real advantage but it can saddle you with a small agency with a lack of resources.

We take the worry out of this for you, by only matching you with a collection agency licensed to collect debt within your state. So rest assured, save a few hours of hassle and use our form below to me match with a collection agency who operates within your state.

You are now prepared to hire a collection agency!

We have covered all the main steps of hiring a collection agency to represent your small business. Sadly, if you travel down any main street in America, you will not see a sign that says “Hire Collection Agency” or find a book at the library titled “How to hire collection agency for dummies”.

If you are ready to get a free quote, click the button below to starting your collection agency hiring process.