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Debt Collection Agencies Guide
Debt collection agencies are a means to an end: They help end the difficult problem of bad debt, or money that you've lent and cannot collect. While it is possible to deal with this situation internally, it's costly to track down debtors and continue attempting to collect, especially if you're part of a small business. There are several methods to implement to avoid needing to collect debts, but sometimes you'll just need a professional. After all, your job doesn't include running around trying to close delinquent accounts, which affects your resources and tests your patience. In these cases, it's a good idea to hire a debt collection agency. With that in mind, not all are equal, which means not all will work for the kind of business you run. The tactics and behavior of the agency will have an impact on your company's reputation as well, so it's key to pick one that is likely to get your debt repaid while remaining respectable about it.
It can be difficult to find the right debt collection agency, especially since you might not know how to predict whether or not they'll succeed. Consider looking at the following factors:
- History with your Industry - Depending on the nature of your business, you may have certain regulations or rely on certain collection tactics, such as a medical office needing to adhere to HIPPA. With extra consideration in mind, look for an agency that has worked in your industry before. Some examples that immediately stand out include medical accounts, student loans or government loans.
- Firm Reputation - Take the time to examine an agent's references, especially from businesses in your industry. Be sure to actually contact the references and ask any questions you have, including what their opinion of the agency is. Do they experience any problems? What kind of success do they bring in? Check in with the Better Business Bureau as well, and checking whether they are accredited by the International Association of Commercial Collector.
- Collection Tactics - If you don't interact with a debtor according to laws governing your industry, you can be held liable. As such, ensure compliance by checking letters before they're sent, request information about training, and be sure to review the telephone scripts that representatives follow. In addition to this, examine how they can handle hardship cases.
- Skip Tracing - It's an unfortunate truth that debtors sometimes skip town and don't leave a forwarding address. To prevent this, skip tracing can be used, meaning an agency can access numerous databases to pinpoint where a debtor has gone. If you have made personal futile attempts to get in touch with a debtor, this is going to be especially important.
- Check for Insurance - Regardless of one's reputation, it's possible that the debtor feels the agency used bad faith tactics or was overly aggressive. When this happens, the debtor will be able to sue. It doesn't matter if you win or lose -- you don't want to be the one responsible for picking the agency. Obtain proof of insurance in case the debtor takes you and the agency to court. This is typically known as Errors and Omissions Insurance.
Typically, debt collection is contractual work, done on a contingency basis. The agency takes some of the money that they collect, and the rest goes back to the company that hired them. Depending on the debt age, the amount that is owed, debtor demographics and how many collections you have, commissions may be as little as 10 percent or as high as 50 percent. On average, however, they're usually about 25 percent for delinquencies under a year old. Typically, the collection agency will have the same overhead regardless of the size of the debt. However, larger debts offer a bigger dollar amount on commission, which means the agency is more likely to offer a smaller percentage on larger debts. Newer debts are also more likely to be recovered, so that percentage often is low as well. Once a lawyer is likely to get involved, you'll start seeing the high percentage marks. Be sure to balance the commission with the agency's rate of recovery. If you need to collect $10,000 and are willing to pay 25 percent commission for a company that recovers 70 percent of the debt, you'll get back $5,250. A 10 percent commission seems great, but if the agency only recovers 40 percent, you'll only get paid $3,600.
Like with any industry, you must do your research. Some debt collection agencies work better in some industries but poorly in others. For instance, you cannot hire any agency for government debt collection -- this will require specialists with a history of recovering such debts.
Verify the Legitimacy of the Agency
There are different rules set into place depending on the state and locality of a debt collection agency. Make sure to ask for proof that the agency is bonded and licensed, and ensure their tactics fall in line with not only your needs but the Fair Debt Collection Practices Act.
Be Open and Upfront
Agencies are more efficient with all provided information. For every account that you want to send over, be sure to give them as much of the following information as you can:
- Contact information, such as business name, address, phone number, fax number, DBAs, pager or cell phone
- Note whether your mail has been returned or delivered
- Name other creditors that you know your customer works with
- Provide a complete history of all transactions in the collections as well as any disputes with the customer
While it's impossible to guarantee that you'll prevent every problem, there are several tactics you can take to reduce the overall likelihood of getting into bad debt:
- Be careful before offering someone credit: Thoroughly check credit references for any new account, and never extend more than you can afford.
- Be transparent about transaction terms: Make it very clear when you want payment and what kind of penalties apply for any early or late payments.
- Contact overdue debtors: Customers will rarely police themselves; send a statement promptly and remind them that a payment due date is past.
- Create a template of overdue notices: Regular written reminders should be sent before even thinking of getting an agency to do the work. Not only will you save money, but ill will is often generated by hiring an agency.
- Stick to the deadline: As a final preparation, set a date that the customer must contact you by before turning over the account. Do not provide an extension, but do provide generous warning of this final opportunity to contact your company.