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.

Business References

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.

Collection Ratio

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.

Cash flow is the lifeblood of small business. Small businesses rely on customer payments to fund daily operations, pay suppliers and employees, order resources and plan ahead. Without cash flow, a small business is pretty much lifeless.

Recession and bad debts

The recessive environment has impacted small businesses by reducing the disposable income of direct customers. The fall in demand is made worse by client companies that delay payments to collect interest on funds for their own business operations. As small businesses want more business from customers, they avoid the unpleasantness of reminding customers about payments. Plus, many clients are plain difficult. They disown claims to get out of paying. As small businesses are usually short of time, personnel and money, they cannot follow up on payments with the necessary aggression and tenacity. The result is a buildup of bad debts that show poorly on credit reports.

Collection agencies can improve bottom lines

Small businesses plagued with bad debt should consider hiring collection agencies before giving up on overdue payments. These professional agencies can reduce the time to receiving payments, increase profits by recovering high percentage of dues, ensure compliance to the Fair Debt Collection Practices Act (FDCP Act), sustain customer relationships and increase productivity by allowing business owners to divert all their energies towards business growth and profit.

Collection agencies work by sending out demand letters to the debtors, and follow it up with calls or personal interviews to get some commitment towards payment. Usually, this is all that is needed to retrieve payments. However, if the collection agency perceives that the customer is reluctant to pay dues, they may recommend the business to file a lawsuit against the customer.

Collection agencies work on commissions and have the incentive to collect more at the earliest. It makes business sense for small businesses to retain a collection agency for payment collections so that they can recover overdue payments and increase their cash flows for daily operations.