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How Debt Collection Services Work
As a small business, getting paid by your clients, whether they be other businesses or consumers, is a crucial part of being successful. If you’ve been trying to collect funds from a customer who doesn’t seem interested in paying, you may be considering hiring a collection agency to manage the debt for you. If you have a few outstanding debts you’d like to recover, this might be a good path to go down. Before fully committing, do your research to ensure both you and your customers have a positive experience dealing with the collection agency.
Sending Someone to Collections
Although sending someone to collections doesn’t feel great, allowing your business to suffer losses probably feels worse. There is a window of time (within the first three months) when your chances of getting paid are high, after which the probability of collecting customer funds often goes down significantly. Giving a customer a short grace period in which their payment can be late before sending them to collections is a courtesy, but it’s best not to wait much more than 90 days or they may never pay up — ultimately, this depends on the customer.
Collection Agency Fees
What you pay the collection agency depends on what type of agency you hire to collect your funds. Typically, they are paid by receiving a percentage of the funds they recover; the smaller the debt, the larger the percentage they receive to cover their costs. For debts under $1000, they may receive 50 percent of the collected funds; however, for large debts, say over $500,000 they only receive about 10 percent.
Their fees also change based on the age of the debt, as older debts are less likely to be recovered. For debts between three and six months, they typically receive 25 percent of recovered funds, whereas they receive 50 percent of recovered funds that are over two years old. These fees may vary depending on if you’re using a commercial agency to recover funds from other businesses, or a retail agency to recover funds from individual customers.
Do I Need a Collection Agency for My Business?
Most businesses, even small ones, will eventually encounter a situation where a client is late to pay, can’t afford to pay, or refuses to pay altogether. These can be incredibly frustrating situations, however, it’s good business practice to address each situation on a case by case basis. If a loyal customer is late to pay, treating them with respect and giving them the benefit of the doubt can help keep their business.
If a new customer refuses to pay for services they received right off the bat, this may be more concerning. If a customer doesn’t have a history of making payments, it’s harder to tell whether they will end up paying for goods and services or not. If your business is spending a lot of time attempting to collect debts from customer, a collection agency may be the right move.
Pros of Using Debt Collection Services
Nobody likes receiving calls from debt collectors. This is often seen as a serious step in an unpaid debt and customers immediately begin to worry about their credit after they are contacted. Therefore, debt collection services can strongly encourage clients to pay up, and will increase your chances of recovering funds from customers without too much effort on your part.
Drawbacks and Limitations of Hiring a Collection Agency
Hiring a collection agency does not guarantee you will be paid, but if they are able to collect the debt, you’ll be paying out between 10 and 50 percent of the debt owed for their services, which can amount to a lot. Hiring a collection agency also tends to cause some hard feelings with customers who may want to pay and are simply unable at the time.
How To Find a Debt Collection Agency
When looking for a collection agency to hire, do some research about their track history and business practices. Although you want a company who has a reputation of getting paid, you don’t want to go with an agency that has been known to harass customers and break FDCPA laws in order to collect debts, as this can reflect poorly on your business. You also want to hire an agency that deals with similar accounts to yours; if you go to a huge agency with only a handful of accounts you’re seeking to collect, they may not prioritize your business’ accounts.
Deciding to use a collection agency to recover outstanding debts from customers may not be something you’re excited about doing; however, there comes a time where this route becomes necessary for your small business to succeed. It can be difficult to make decisions like this, but by choosing the right debt collection services for your business and always taking the time to consider which accounts you can no longer wait on to be paid, you’ll be making the tough calls that are necessary to keep your business running.
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