What Is a Collection Agency?

Simply put, a collection agency is an organization that offers services to lenders and creditors so that they can recover funds that are past due or in default. Usually, a creditor hires a collection agency after it has made several failed attempts to collect a debt.

How Does Collection Work?

When an individual doesn’t pay their bills or fails to make a scheduled loan payment, the creditor will typically take the next steps against them. First they can report the delinquency to a credit bureau. This will affect the borrower’s credit history. Within three to six months of default, the creditor can then turn the debt over to a collection agency.

At this point, two things can happen. The borrower can make payments in response to the collection agency’s efforts, or they can simply continue to ignore the debt. When the individual pays, either the entire debt or a portion of what’s owed on a payment plan, the collection agency will receive a percentage of the funds.

When the individual still does not make any type of payment on their past-due debt, the collection agency can change their credit report to signify that it is in collection status. This action will lead to a drop in the borrower’s credit score. The change in the credit score will vary depending on multiple factors, including the current score and the size of the debt. An account that is listed as being in debt collections can remain on a credit report for as long as seven years.

To obtain past due monies, collection agencies can try multiple strategies, including:

  • Make phone calls to the individual’s home, mobile, and office telephones
  • Mail late-payment notices and collection letters
  • Contact the debtor’s family, friends, and neighbors to confirm the individual’s contact information
  • Appear at the debtor’s home

The collection agency is limited in their actions and is bound by the Fair Debt Collection Practices Act (FDCPA). They cannot threaten the debtor in any way.

What Are The Benefits of Using a Collection Agency?

There are numerous reasons to use a collection agency when you are unable to collect past due debts from your clients. As a business owner, you don’t have the time to track down debtors and continue following up with phone calls when bills remain unpaid. While some businesses have internal collection agencies, it may be time to go to a third-party collection agency when debts become overwhelming.

Benefits for using a collection agency include the following:

#1. Legal Protection

Unless you are well versed in the FDCPA, you might want to consider a collection agency, whose expertise will protect you from any unwanted lawsuits. Agencies are knowledgeable in both federal and state laws regarding debt collection practices. Using a collection service will eliminate the risk of legal repercussions of attempting to collect a debt on your own.

#2. Documentation

Collection agencies record each step of the collection process. Should you decide to sue the debtor, you will have thorough documentation of the collection agency’s attempts to retrieve the debt. Also, if you claim the bad debt as a tax deduction, you will need records for your taxes. The IRS will want to know that you exhausted every option prior to writing off the debt.

#3. Successful Debt Collection

Collection agencies have experience and a higher success rate when collecting past due debts. Hiring a debt collection service will increase your odds of collecting monies and allow you to focus on your business rather than chasing debtors.

#4. Faster Payment

Not only are people more apt to pay when approached by a collection agency, but they also tend to pay faster than if you were to continue reaching out to them. When people realize that their credit score may be affected, they tend to respond immediately to prevent any dip in their credit record.

5 Tips to Picking the Right Collection Agency

When choosing a collection agency, you want to make sure that you pick one that matches the needs of your business, while collecting the maximum amount of debt owed. There are certain factors to consider when choosing a debt collection agency.

#1. Consider the overall ROI

You may want to judge a collection service by the percentage charged for recovery, but that’s only one factor to consider. You’ll want to look at their collection history and see how much cash they typically draw on each recovery. You may be tempted to go with an agency that charges a low percentage, only to find out that they only recover a low return. However, another agency that charges a higher percentage puts a larger amount of money back into your business by recovering a higher amount of past-due funds. Look not only into the number of monies recovered but also into the company’s recovery rate.

#2. Require excellent customer service

Bill collectors don’t threaten or harass people in attempts to retrieve funds. Instead, they should be friendly and helpful, attempting to maintain a good working relationship with your customer, regardless of the fact that they are past due with payments. Collection agencies should offer payment plans and make it easier for clients to make payments.

#3. Do your research

Take the time to read reviews and talk to other clients that work with the collection agency to find out more about them. Just like any purchasing situation, you want to look around and do your research before committing to one agency.

#4. Check that they are licensed

All collection agencies must be licensed to practice in the state they are located. You will need to make sure that the agency is licensed not just where you are located, but where your clients live.

#5. Review past reporting

You should expect a monthly statement from the collection agency you use. They should report to you collection rates and any payments on the accounts since the last statement and a summary of the overall payments made. Many companies even offer online access to your account where you can review statements whenever it’s convenient for you.

Working with the right collection agency will help improve your company’s cash flow and set your mind at ease. Take the time to do your research before making a decision about which collection agency will be best for your company, then select a collection service that will be a partner who gets results for your business.