How Small Businesses Hire a Collection Agency

How Small Businesses Hire a Collection AgencyCredit Stephen VanHorn/Shutterstock If you have unpaid invoices from clients, youre not alone. A 2017 report by Sage called The Domino Effect The Impact of Late Payments, found that 10 percent of invoices are either never paid or paid so late that the company is forced to write them off.If youre the owner of a small or medium-size geschftliches miteinander, you probably dont have the staff to dedicate to running down one in 10 invoices. If thats a large number of unpaid invoices for your business, it may be worthwhile to hire a collection agency to deal with clients that arent paying their bills. But where do you begin?Editors Note Looking for a collection agency for your business? If youre looking for information to help you choose the one thats right for you, use the questionnaire below to have our sister site, BuyerZone, provide you with information from a variety of vendors for freeDo your researchDifferent agencies have different specialties. For example, some are better at getting results from larger businesses, while others are skilled collecting from home-based businesses. Youll want to make sure youre working with a company that will actually serve your needs.Ask if they are qualifiedThis may seem obvious, but before you hire a collection agency, you need to ensure that they are qualified and licensed to act as debt collectors.Not every state requires that collection agencies be licensed, but most do. Before you begin your search, understand what the licensing requirements are for collection agencies in your state. That way, when you are interviewing agencies, you can speak intelligently about your states requirements.Check with the agencies you speak with to ensure they meet the licensing requirements for your state, especially if they are located elsewhere. Youll need to confirm they adhere to the rules of the Fair Debt Collection Practices Act.You should also check with your B etter Business Bureau and the Commercial Collection Agency Association for the names of reputable and highly regarded debt collectors.Understand how they will work for youWhile you may be passing along these debts to a collector, they are still representing your company. You need to know how they will represent you, how they will work with you, and what relevant experience they have.As you consider collection agencies, ask them what tactics they use in their collections process. Just because a tactic is legal doesnt mean that its something you want your company name associated with. A reputable debt collector will work with you to lay out a plan you can live with, that treats your former customers the way youd want to be treated and still gets the job done.Sometimes debtors will leave town, and one tactic many use is skip tracing. That means they have access to certain databases to help locate a debtor who has left no forwarding address. This can be a good tactic to specifically ask about.You should also dig into the collectors experience. Have they worked with companies in your industry before? Is your situation outside of their experience, or is it something they are familiar with? Relevant experience increases the likelihood that their collection efforts will be successful.You should also discuss with the collection agency how they will work with you. You should have a point of contact that you can communicate with and receive updates from. They should be able to clearly articulate what will be expected from you in the process, what youll need to provide, and what the cadence and triggers for communication will be. Your chosen agency should be able to accommodate your chosen communication needs, not force you to accept theirs.Are they insured?If an agency isnt forthright about their practices, and you find out later that they are being overly aggressive, that agency and possibly your company can get sued by the debtor.Regardless of whether you win such a ca se or not, you want to be sure that your company is not the one on the hook. Get proof of insurance from any collections agency just to be sure. This is most often called an errors and omissions insurance policy.Be ready to payDebt collection is a service, and its not a cheap one. In many ways, its the last resort before giving up on unpaid invoices completely. Its important to remember this when you discuss fees when looking to hire a collection agency.There are generally two payment structures you can expect when talking with a debt collection company.Payment on collection In this model, the business works on collecting the debt and pays your company when collection is made. Their fee is typically a percentage of each invoice. The catch is that should the collector settle for less than the invoice amount, the agencys fee does not decrease.As an example, lets say you negotiate 25 percent of each invoice will be retained by the collection company. If you have an invoice for $1,000, the agencys fee would be $250. If the debt collector, however, negotiates a settlement of $500 with your client, youll only see one-quarter of the original invoice amount.Purchase of debts This is the most hands-off method but also requires that the debt collector take on the most risk. As a result, this model tends to be the more expensive option.When a collection agency purchases your debts, they pay you a percentage of the outstanding invoices. If you have $50,000 in unpaid invoices, an agency may pay you $15,000 to purchase them from you and then proceed to work on collecting on the unpaid amounts. Any money that they collect is now theirs to keep.Hiring a collection agency may help you recover senfgas income from bad debts. But companies must be careful when hiring a debt collection firm to ensure that they are properly licensed, experienced and will represent your company well. Debt collection can be costly, but the amount you receive from unpaid invoices may be worth it.Can y ou break your contract?Once youve signed an agreement with a collection agency, it can be tough but not impossible to break. Check your contract for a termination clause. If not, contact the agency and directly negotiate such an arrangement.A termination clause could permit you to break the contract by paying a fee or providing notice within a specific time frame. There may be a deadline in the agreement by which time if the agency hasnt delivered, you can enact an escape clause. Or if the company presents a fraudulent agreement, you can generally break the contract. But youll want to consult a lawyer first.A material breach of contract could be grounds for termination. For instance, if they do not follow through on key points of the contract, you may be able to break the agreement. Or you can simply ask the company what their cancellation fee might be. Dawn Kuczwara Dawn Kuczwara is a former executive with more than 17 years of experience in technology. Now, as a professional writer, Dawn uses that experience to write about business, technology and leadership. 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