Every business needs to partner with a collection agency to help recover its bad debts. Collection agencies have the personnel, tools and knowledge to help with debt collections.
Collection agencies try to recover bad debts by contacting delinquent customers through written notices, phone calls and personal visits. As the collection agency is working on your behalf, the behavior of the collection agents is very important as it will most definitely affect your business’ relationship with the customers. Therefore, it is important to thoroughly vet collection agencies, their practices, style of working and references.
You must verify the below important factors before selecting the right collection agency for your business’ debt collection needs:
Years of Experience
The experience of the collection agency can be assessed by asking these questions:
- How long has it existed?
- Who are its clients?
- How long has it been working for these clients?
- Has it received any awards or recognition for its services?
- Does it have insurance?
Experience in your specific industry
Bad debt accounts vary with the type of business — student loan, mortgage, medical loan, child support, service debt and so on. All these accounts require collection agencies to abide by different legal standards and procedures. In fact, some collection agencies have dedicated collection services for specific types of debts such as healthcare, retail, financial, etc.
You must verify if the collection agency has experience in recovering bad debt for customer accounts in your specific industry. An inexperienced collection agency could ruin your customer relationships through improper interactions and dealings.
Get several references from businesses or establishments that have worked with or are currently working with the collection agency. If you cannot get references, verify the collection agency’s reputation by contacting the Better Business Bureau or Chamber of Commerce.
Collection Agency’s Fees and Rates
Collection agencies work on fixed rates or commission. The percentage of the commission is usually fixed mutually by the creditor and the collection agency. However, there could be a significant difference between the amount recovered (minus the commission) and what is transferred to the creditor. This is because the collection agency may add charges for extra services, apart from the commission. Find out about additional fees, so that there are no surprises later.
Many collection agencies offer services that are relatively inexpensive. The more important consideration is what is their collection ratio. If there are several bad debt accounts and the collection agency is not able to recover most of them you are still losing money. Another consideration should be how long does it take for the collection agency to recover the bad debt. The older the bad debts the lesser are its chances of recovery.
Some collection agencies pursue bad debts with high balances and neglect bad debts with small balances as they are paid on commissions. However, it is important for your business to recover all ba debts and the collection agency must be willing to work all the accounts to maximize the recovery of bad debts.
Compliance with licensing and state bonding
You must ensure that the collection agency complies with all state bonding and has the license to operate in the geographical region where your customers are located.
Compliance with the FDCP Act
Collection agencies are regulated by the Fair Debt Collection Practices Act (FDCP Act). The FDCP Act protects customers from undue harassment by unscrupulous debt collectors. Make sure the collection agency you hire follows the rules laid down by the FDCP Act. Violation of the FDCP Act will land the collection agency and your business in legal trouble.
Professional and law-abiding collection agencies can help you increase your profit streams while maintaining your customer relationships and keeping you safe from any legal entanglements.