How to Choose a Collections Agency

 In Legal

We’ve discussed collections before. Collections are always an option for non-paying accounts, but you should always exhaust other options first before going that route. Once you have, it’s time to use a collections agency, but how do you know which one is the right fit for your business? Business News Daily discussed how to hire a collections agency. Here’s what you need to do when the bills aren’t getting paid.

When to hire a collection agency

Most companies send accounts to a collection agency when they are between 90 and 120 days past due. If you wait longer than that, you’re far less likely to recover the debt. The more time that passes, the lower the chances. Generally, it’s time to start thinking about hiring a collection agency if:

  • New customers do not respond to your first attempt to collect the debt. When you do not have a history of transactions with the customer, there’s a greater chance they will refuse to pay or never intended to.
  • You’ve agreed to a payment plan, but the customer does not follow through. Customers who still won’t pay after you’ve agreed to meet them halfway with a payment plan are unlikely to change their minds.
  • A customer completely denies responsibility for the debt. Without a collection agency, these debts are rarely recovered.
  • The customer makes unfounded complaints about your business, product or service as an excuse not to pay. Most of the time, these complaints are just an excuse to get out of paying the debt.
  • The customer is going through a serious personal situation such as a divorce. Often, one spouse blames the other for the debt. A collection agency will be able to get to the bottom of who’s responsible.
  • The customer has a long history of being financially irresponsible.

Deciding when to hire a collection agency is a personal choice, of course. But once it becomes clear you’ve exhausted all your options and aren’t getting anywhere, the debt is better left in the hands of a professional agency. It is better to recover some portion of the debt than none of it.

Choosing a collection agency

There are more than 5,000 collection agencies in the United States alone, and not all are alike — far from it, in fact. Some handle consumer accounts, while others specialize in business-to-business (B2B) collections. The biggest firms often handle both. Some collection agencies specialize in certain industries such as medical, insurance, utilities, credit cards, mortgages or auto loans, while others work for a number of industries. There are agencies that cater specifically to small businesses and those that cater to large corporations. Some agencies are local or statewide in focus, while others are national firms.

Generally, it is important to hire a collection agency that has an established track record of successful collections in your industry. The agency needs to be familiar with the terminology in your industry, and the rules or regulations set forth by state or federal agencies governing your industry, if applicable. If you’re in the medical field, for example, the agency needs to be well versed in insurance requirements and medical terms. Those that have consumer debt, on the other hand, must find an agency that specializes in consumer debt. If you have business customers, choose one that specializes in B2B. For those with both types of debtors, consider dividing the debts between two collection agencies for more focused efforts and better results.

Still, for many small businesses, the hardest part of choosing a collection agency is narrowing down the search from the thousands of options.

Here are some practical tips that will help you get started:

Ask for referrals

Obtain referrals from your attorney, accountant or trusted business associates in your industry. Referrals are extremely valuable if they come from a person you trust. Go beyond just asking for agency names and find out why the person is making that recommendation. Does the agency have a high success rate? Are they known for strict adherence to laws?

Search the ACA International directly

Use this search to find a member agency that is licensed in your city or state. ACA International, the Association of Credit and Collections Professionals, is a nonprofit that establishes ethical standards for the industry and requires its members to adhere to them.

Check the Better Business Bureau

Use this tool for ratings on any collection agency you are considering. One or two complaints can be a fluke, but a slew of complaints should be a major red flag.

Make sure the company is state-licensed and/or bonded, if applicable

Many states require one or both.

Find out where the agency is licensed

If you only do business locally, an agency that is licensed only in your state is just fine. If you have customers across the country, find an agency that is licensed in all states that require it.

Find out if the company is insured

Errors and Omissions Liability Insurance (E&O) is often a sign of a reputable agency. E&O insurance provides coverage for claims brought by consumers for improper conduct such as harassment or slander. In many cases, that coverage is also extended to your business. While E&O insurance is not required by any federal or state laws, it’s a sign of good faith.

Visit the collection agency

Before you commit, sit down with the collection agency to learn more about them. There’s a lot you can tell about whether the agency is reputable and a good fit simply by talking to them. Ask to see proof of results — what percentage of debts have they successfully collected? Find out which tactics and technologies the agency uses in its collection efforts. Ask for references, and take the time to check them. If the company doesn’t seem like a good fit, trust your instincts and move on.

Don’t worry too much about size

A large, national firm is not necessarily a better fit than a small, local one. It depends on your needs, the agency’s strengths, its reputation and its track record.

Integrity, standards and legal issues


When you’re choosing a collection agency, integrity and reputation are among the most important considerations. Never choose a company with questionable standards, even if the company gets results. Developing a reputation for illegal and harassing methods of debt collection can damage your reputation, costing you current and future customers. In worst-case scenarios, your company can face litigation for a collection agency’s illegal practices, even if you were not aware of the actions.

Standards and Legal Issues

Fair Debt Collection Practices Act

All consumer collection agencies are required to comply with a federal law regulating the industry known as the Fair Debt Collection Practices Act (FDCPA). The law was created to end deceptive, abusive and unfair debt collection practices. It prohibits a long list of tactics, including threats, abusive language, revealing the nature of debts to third parties such as family members or co-workers, calling outside of approved hours, failing to cease communication upon request and more. Collection agencies that violate these rules are subject to loss of license and/or hefty fines — sometimes hundreds of thousands of dollars. However, the law does not apply to commercial agencies.

Licenses and Certifications

Many, but not all, states require collection agencies to be licensed and/or bonded. Always find out what your state requires, and check to find out whether the collection agency you’re considering is compliant. While membership to ACA International is not mandated in any way, you’re always better off hiring an agency that has it because it means it has been vetted. If you’re dealing with commercial or B2B debt, look for a collection agency that is certified by the Commercial Law League of America (CLLA) and a member of the Commercial Collection Agency Association (CCAA). Both the ACA and CCAA require commercial collection agencies to:

  • Follow a strict code of ethics
  • Follow proper accounting principles

The CCAA, for example, audits an agency’s financials every two years and requires a $300,000 bond.

Some red flags alert you to the fact that an agency may not be reputable. Past lawsuits should give you pause, and it’s usually easy to find out about them with a simple Google search. Unrealistic claims also raise a red flag. Generally, the collections process collects only two-thirds of debts. Be suspicious of any company that tells you differently.

Fee structures

Fee Factors

There are many factors that go into collection agency fees, including the size of the debt portfolio, the type of work required to collect, the age of the account, the agency’s experience and more. Most collection agencies have some type of tiered pricing structure, and most charge only when they collect.

Many people confuse collection agencies with debt buyers, although there are distinctions between the two. Collection agencies earn a percentage of any outstanding debt they recover, but they don’t own the debt. When they collect a debt, they hand the money over to your company, minus a certain percentage in fees. Debt buyers, on the other hand, purchase debt for a reduced price — sometimes pennies on the dollar — and keep all the money they collect.

How Agencies Collect Fees

Contingency fees: fees charged as a percentage of the collected debt. These can range from as little as 10 percent for large debts that go into collections early — when the likelihood of collecting is much higher — to 50 percent or more for smaller, older and subprime debts. The average contingency fee is closer to 25-35 percent. At 25 percent, for example, you would collect $775 on $1,000 worth of recovered debts.

What many business don’t realize is that contingency fees can be negotiable. For those with a lot of debt, negotiate a lower rate. Do not accept the first rate offered without countering. Because there are so many collection agencies from which to choose, you should also compare rates among several. However, keep in mind that the lowest rate doesn’t always mean the best results. The return rate is what’s really important. If you pay a 25 percent fee on $1,000 worth of debt and the agency collects only $300 of that, your return is $225. However, if you pay 35 percent to an agency that collects $500, you reclaim $325.

In some case, although far less often, a collection agency will charge a flat fee for their services. Typically, an agency will only agree to do this if the debt is less than 90 days old — otherwise known as pre-collection — or just over 90 days.

Technology and training

The best collection agencies have the proper tools and resources in place to ensure that they see the highest returns, including technologies, partnerships with other agencies and attorneys, and a highly skilled and trained staff.

Technologies to look for include:

  • Skip tracing services, used to locate customers that are hard to find. Typically, these are databases that allow collection agencies to find debtors who have moved without leaving a forwarding address.
  • Digital technologies that go beyond just phone calls and snail-mail letters, allowing customers to negotiate payments or file a dispute online. These appeal to younger debtors and to people who are uncomfortable discussing their debt with collection agencies over the phone.
  • Algorithm-based collections processes that tailor strategies to the debtor. This allows collection agencies to build a profile in order to better understand the customer and the right way to approach them. Often, an email is the first form of communication, rather than a formal letter.
  • Online access that allows you to monitor the status of accounts, communicate with the agency and run reports on the status of your collections. This is especially helpful if you have a large number of accounts with the collection agency. It allows for real-time information, rather than waiting around for weekly or monthly status reports.

Properly trained collectors are also crucial. Select a company with experienced employees and skilled negotiators. Find out if the collection agency’s employees receive regular education and training. Courses are available through ACA and other membership organizations. If possible, arrange to listen in on a few calls before committing to a collection agency.

How to work with your collection agency

Beyond just choosing a collection agency, you’ll need to put some effort into managing the relationship over time. You want a collection agency that works like a partner, not just a contractor. The agency should be willing to meet face-to-face periodically to review the status of your accounts, and they should promptly return phone calls and emails — ideally within one business day.

There’s work to do on your end, too. To promote the highest possible returns, you should provide the collection agency with as much information about the debtors as possible, including:

  • Names, addresses and telephone numbers.
  • Cellphone numbers and email addresses.
  • Names of the debtor’s spouse, friends, relatives and neighbors.
  • Information about how — or if — the debtor has responded to your debt collection efforts.
  • Details about the purchase or transaction, and the date.
  • Any paperwork related to the transaction, including contracts and credit applications.
  • Nicknames, maiden names and aliases.

Hire a Collections Agency

When selecting your agency, minimize liability by ensuring the company is properly licensed and insured and operates in a legal manner. Money is also another factor to consider when selection a collections agency – you want as little money lost as possible. What you ultimately need to remember is to treat them as any other business partner, be respectful and work together.

More Resources:

The Best Collections Agency Services

Manage Small Business Collections

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