Choosing a Collection Agency for Your Small Business

How to Choose a Debt Collection Agency
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Getting customers to pay is one of the most difficult tasks for a small business, but it's one of the most important. One possibility is hiring a debt collection agency, which we'll discuss in this article. But first...

Alternatives for Getting Customers to Pay

Below are a few potential alternatives before seeking help from a collection agency.

  • Collect by Yourself. Some people just won't pay–ever. And some people will pay only if you push them. Your job as a business owner is to set up good procedures so you can collect money from customers yourself. Having a collections management system that you run yourself will get you money faster and easier, and at low expense. You'll need to know the laws protecting debtors to avoid a lawsuit and the time limits for collecting a debt.
  • Small Claims Court is a possible way to get people to pay if the debt amount is small and the debtor is local. The process is simple and inexpensive. If you have the documentation that the work was done or the product was delivered, you have a good chance of getting the court to agree.
  • Hiring a collections attorney is another way to increase the possibility of getting paid. Sometimes just the mention of an attorney in a letter can get them to pay. But be careful because you can't threaten to turn the debt over to an attorney and then not follow up. You can get sued for this.
  • Selling the debt outright. Accounts receivable factors buy debt outright, serving as accounts receivable factors. In this case, you have no control over how the factor collects on the debt. Usually, this works best when you have a bunch of debts and you need money. The cost is based on a percentage of the total amount collectible, and it can range from 30% to 90% of the debt.

How Collection Agencies Work & How Much they Cost

Collection agencies are a good alternative when you can't contact the debtor, when the debt is too large for small claims court, or when you have several hard-to-collect debts.

The most common way these collection agents work is for the business to turn over the names and information of the debtors to the agency. The agency then attempts to collect the debt and turns over the amount collected to the company, less their fee. The fees charged by collection agencies can range from 25% to 45%.

Sometimes collection agencies will negotiate with debtors, depending on the arrangement between your business and the agency. Since your business still owns the debt, you can take it back and continue to work on it if the collection agency fails.

What If the Collection Agency Doesn't Collect the Debt?

Your next move depends on the individual factors of the debt. If the debtor can't be found, even by the collection agency, you may just have to give up. You can't collect on someone if you can't contact to give them a court order.

If you can find the debtor, you may still want to consider small claims court. Collecting on a small claims court judgment is difficult, as noted above, but you might want to try if you don't mind the adversarial issue of collecting on a current patient.

You could still consider hiring an attorney to collect a specific debt. But they may not take the case if the collection agency hasn't been successful.

Are Collection Agencies Regulated?

The short answer is: yes – and no. Debt collectors are regulated by the federal government, through the Fair Debt Collection Practices Act (FDCPA) for personal debts. The FDCPA doesn't regulate collections for business debts.

If Your Customers Are Businesses...

...collectors aren't limited in what they can do to collect a debt owed BY a business. This doesn't mean they can use illegal practices like threats and fraud.

If Your Customers Aren't Businesses...

...the FDCPA does apply. According to the Consumer Financial Protection Bureau, this means a collection agency cannot:

  • Call before 8 AM or after 9 PM
  • Call at work
  • Harass, oppress, or abuse someone
  • Lie or make false statements
  • Use unfair practices
  • Conceal identity
  • Disregard a written request to cease contact

How to Choose a Collection Agency

To find a collection agency, you can search locally or look online. You want a company that's a good fit with your business and has good ethical collections practices.

Check out the agency to make sure they don't engage in illegal or unethical practices.

Some tips:

  • Ask how the agency tracks and finds debtors
  • Ask them to show you a typical script they use
  • Check the reviews on Google for local agencies
  • Check the company's Better Business Bureau record and rating
  • Consumer Affairs (a private company) rates collection agencies
  • If you are still unsure, you might try contacting your state's attorney general to check on state laws and lawsuits against this agency
  • The Consumer Financial Protection Bureau administers the FDCPA and it takes complaints. You might be able to check on complaints against an agency you are considering.