The settlement of debts acquired by either another company or an individual is one of the most common challenges that businesses experience. Collecting debts is time-consuming, especially if the debtor refuses to cooperate. Due to the frustration they encounter when collecting debts, they may resort to outsourcing the debt collection process to a collection agency for small businesses.
Collection agencies for small businesses are third-party establishments that collect overdue payments or funds from default accounts. They work closely with the credit bureaus when recovering delinquent funds. What they can and cannot do when doing so are regulated by the Fair Debt Collection Practices Act.
How Small Businesses Proceed with Collections
When business owners are confronted with clients that do not pay on time, it can affect their overall projected revenue for the year. Although there are cases when your clients are struggling to pay due to financial difficulties, it can be solved if clients are willing to come up with an agreement to have their debts readjusted.
However, what happens when your client refuses to pay their delinquent accounts? Whenever your in-house collector visits the client’s home or calls them, and they do not respond, it can become problematic. If your business is affected by this kind of situation, it is time to seek help from collection agencies.
How Collection Agencies Help Small Businesses
It is natural for your business to ask for assistance from collection agencies, especially if you are having trouble collecting overdue payments. Once you have turned over the default accounts to the agencies, they will do the collection for you. The debt collectors will then contact your B2C or B2B clients regarding their overdue payments.
There are laws regulated by the Federal and state for debt collectors. They are strictly mandated to adhere to these laws, as per the Fair Debt Collection Practices Act. They have a list of guidelines that debt collectors must follow when collecting from default accounts.
If your clients fail to settle their overdue payments, it is within the rights of the collection agency you hired to do the following:
- Report the collection account of the business or individuals with an overdue balance to the credit bureaus.
- Resort to a lawsuit in an attempt to settle default accounts.
How Collection Agencies Work When Collecting Default Accounts
Once you have given the collection agencies the right to collect default accounts for you, they will likely move forward with the following procedures:
- The collection agency you hired will confirm the identity of your client, either by mail or phone.
- After verification, the collection agency sends your client with default payments a written debt validation notice.
- Your client continues to receive notification of the overdue payment until he settles.
- If your client agrees to settle the debt, the collection agency closes the account. However, if your client does not agree to pay, it often ends in lawsuits.
How Much Does It Cost to Hire A Collection Agency?
The cost of hiring a collection agency varies according to their policy. They either offer a flat fee collection or work on contingency-based collections.
A flat fee collection is a fixed rate that the third-party charges upfront. The rate is consistent regardless of the size of the account, and the fee is charged per account.
A contingency-based collection is the usual payment model that collection agencies use. If your business hires their services, you will only pay for those successful accounts. The fees are agreed upon by both parties and are determined based on the following:
- Age of the account
- The average balance of the account
- The volume of the account
- The industry served
How to Find a Collection Agency for Your Small Business
There are many collection agencies for small businesses in the market. Some agencies specialize in consumer collection, others in the business collection, while some agencies cater to both consumers and businesses.
Evaluate Whether the Collection Agency Fits the Needs of Your Business
Before hiring a third-party agency to collect default accounts, assess whether the company fits the needs of your business. Some agencies focus on specific industries, business sizes, and regions. Check if the agency can provide your company with the services needed.
Assess if the Agencies Specialized Industries
Some agencies cater to specific forms of industries, such as insurance, healthcare, credit cards, auto loans, etc. Others cater to a wide range of various business industries.
It is highly recommended to choose an agency that works within your industry.
Ask for Referrals
It is not a bad idea to ask for referrals when it comes to acquiring the services of a collection agency. Ask a trusted establishment within your industry which collection agency they hired for collection of default accounts. Look into its success rate to help determine whether the agency is the right fit for your business or not.
The success of recovering default accounts depends on how well the collection agency can do their tasks. Research if the firm can deliver the required results you need.
Check if they are also adept at the laws surrounding the collection of debts. The Fair Debt Collection Practices Act is the governing body that agencies should follow when it comes to the best practices of debt collectors.
What Small Businesses Should Look Out for When Hiring a Collection Agency
Looking for a reputable agency is not that hard when proper research is conducted. As a business owner, choosing the right collection agency that can provide results is essential. However, there are some areas that you should pay particular attention to before hiring an agency.
Collection Rate on Successful Accounts
It is essential that you know the reputation of the debt collector you hired. Look into their previous customer reviews. Reading from other perspectives about the firm gives you an idea of whether they have a high success rate on their collections or not.
All business owners are careful about their reputation. Hence, before agreeing to commit to a collection agency, look into their work ethics.
How do they collect debts? Are they respectful? Do they threaten their clients, or make false statements?
These are essential details you should know, otherwise, your company will suffer bad publicity if it becomes known that you are partnering with a collection agency with an unfavorable reputation.
The law requires collection agencies to be licensed before they can practice. Licenses for in-state and nationwide varies. In-state agencies require local licensing, while nationwide requires the agency to acquire a license for that particular region.
Reporting on Successful Collection of Accounts
Collection reporting is crucial for your business. Remember that the fees, either flat rate or contingency-based, varies according to its collection.
Common pitfalls of most debt collectors are the inability to provide monthly statements and payment of default accounts. Since your goal is to improve your cash flow, reports on default accounts that were successfully settled gives you an idea of how much revenue is added to your business.
When is the Right Time to Hire a Collection Agency?
It is not advisable to wait until the amount of default accounts accumulates before you act. The collection of debts is also part of your income. So, if your company is unable to collect, the organization will suffer.
Debt Recovery Resources is a collection agency that provides cost-effective collection solutions. With over 40+ years of industry experience, we have a reliable, fast recovery result.
Contact us now and improve your revenue projections with our highly successful debt collection recovery strategies.