Hiring a Debt Collection Agency

How to select the RIGHT Collection Agency?


For many businesses, the collection of bad debts can turn into a lot of wasted time.

Unfortunately, this means time that is not able to be spent on other tasks required for operating a prosperous business.

Debt collection is one of the few jobs very conducive to outsourcing!

There are receivables management services which employ fully trained and knowledgeable staff to collect debts on your behalf.

The right collection agency will have the legal expertise and negotiating skills needed to competently recover debts on your behalf in a timely fashion.

Choosing a professional collection service to manage your delinquent accounts is a wise decision, but what should you look for in a collection agency / debt collection firm?

Most importantly, you want a collection agency that is responsible and professional.  After all, they will be representing YOU and can significantly impact your company’s reputation and public image.

You also want a collection agency that will provide satisfactory rates of recovery at a fair price.
Too often, the decision is strictly made based on the “lowest bidder”, which results in subpar results and service.

Careful consideration must be given to ALL of the following factors.


Hiring a Debt Collection Agency


Criteria 1 – Capabilities


Can the agency meet your needs?

Do they have the experience and resources necessary to collect your outstanding accounts receivable?

You should ask about the technology utilized in pursuing accounts as well as the technology used to interface with your system.

For example, many agencies offer services such as skip-tracing to help locate your debtors.  They also leverage technology in establishing efficient interfaces with your system so that the turnover and reporting process is efficient and seamless.

In addition, some agencies offer ancillary services that can assist you BEFORE an account goes delinquent.  These services include: billing, coding, print/mail, hosted dialers, and pre-collect services.

Make sure you discuss ALL your needs and ensure the debt collection agency you choose can handle them PRIOR to hiring.



Criteria 2 – Market Knowledge


Does the debt collection agency understand your market/industry?

If your business is in the healthcare industry, it’s important that they have experience collecting medical debts and know the jargon.

Without a strong knowledge of insurance billing and medical terminology, an unprepared debt collector will not be able to achieve maximum results.



Criteria 3 – Results


What is the debt collector’s historical results with similar clients in the same geographic region and industry?

Benchmarks are important, but remember all the factors that go into the recovery of an account.  Make sure you are comparing apples-to-apples.

“Similar” accounts means that they should have comparable demographic data, aging, and average balances.

Very often, a collection agency will tout a super high result with XYZ client, but, upon detailed analysis, it’s determined that the accounts are turned over to collections real early and had very little work done ahead of time.

Ask the tough questions and be skeptical of any pie-in-the-sky promises for results.  Look for a debt collection agency that will “shoot-straight” with you and not tell you just what you want to hear.



Criteria 4 – Fees


What are the rates you will pay for the debt collection services?

Most agencies will charge a commission on all payments.  This fee structure is very attractive to most creditors because you will only pay for results and the past due bill won’t cost you any more money.

The commission rate varies greatly depending on the age, average balance, and type of debt.

Again, don’t be fooled by too-good-to-be-true rates.  You want a reasonable rate, but you also want results and the higher the incentive – the greater the results.

For example, if you turn over $1,000 of accounts at a 25% commission and the collector only recovers $300, you will receive $225.

If you refer the same amount at 35% commission and the debt collector recovers just one extra account for a total of $500, you will get $325 back.

Your “net-back” is the TRUE gauge of your return, so make sure you don’t over-weight just the commission rate when comparing agencies.



Criteria 5 – Compliance Record


Investigate a debt collection agency’s background thoroughly before hiring them.

Are they member of the industry trade associations?  Do they actively participate and keep up-to-date with the latest rules and regulations?

Ask for details on their policies and procedures.  Look at sample letters, flowcharts, and notes on sample accounts.

Ask if they’ve had any suits filed against them or any instances of regulatory non-compliance / penalties.

Compliance with the Fair Debt Collection Practices Act (FDCPA) is critical to ensuring you are being represented in the most professional and ethical manner.

There are numerous other regulations depending on what industry you serve, so make sure to educate yourself on them and ask the tough questions.

If you need help learning applicable laws and regulations, there are many resources online. Here is a video from the industry trade association – ACA International.



Criteria 6 – References


A great way to validate your options in hiring a debt collector is getting references.

Try to contact at least 2 creditors similar to your business and get their honest feedback.

You can also check a collection agency’s reputation by contacting the Better Business Bureau, or Chamber of Commerce.

However, these organizations often give preferential treatment to those businesses that financially support them.  They allow them to respond differently to negative feedback among other things, so be cautious and don’t rely too much on positive feedback in this area.