Hiring a collection agency isn't always a last resort option. Some companies simply want to offload the time-consuming task of collecting old debts. Whichever boat you're in, there are a few things to know before you hire a collection agency. Going through this checklist will help better ensure that your experience in working with a collection agency goes smoothly.
Since you're reading this article, we'll assume you are collecting business debt and not personal or consumer debt. In other words, you aren't going after individuals but instead pursuing B2B debt.
Finding An Agency
You can start by searching on the web for "collection agencies + [industry]." If your industry is manufacturing, you can search for "collection agency manufacturing." If you know other small businesses within the industry, ask them who they use for debt collections.
Once you've narrowed your search down to a few agencies, try to find out what their rating is on the Better Business Bureau and review sites such as Yelp and Google Reviews. Check how long the company has been in business as well. This can often be done through the state's corporation commission website.
Moreover, check what the agencies recovery rate is.
Does The Cost Structure Work For You?
There are two common cost structures that most collection agencies use:
- Flat rate.
- Percentage of outstanding debt. This is the most common model. The percentage varies across agencies but expect from 25% to less than 50% of the collected amount.
While flat-rate may sound appealing, depending on the sum of debt to be collected, it can actually be more than the percentage amount.
Member of ACA and IACC
Membership in well-known industry organizations can show that the agency adheres to certain standards. Two common collection agency organizations are:
- ACA - Association of Credit and Collection Professionals
- IACC - The International Association of Commercial Collectors, Inc.
If an agency you are considering isn't a member of either organization, inquiry as to why. Being a member might not be a deal breaker, and the agency may have a valid reason for not being a member.
Certifications and Compliances Are Current
Agencies that hold a certification from Commercial Law League of America (CLLA) follow a rigorous set of standards. You can see a full list of requirements that must be met and standards that must be followed on CLLA's website. Here are a few requirement highlights from the website:
- A Certification that the Agency has been in the business of collecting commercial claims for at least four (4) years, as of the date of application, and that the Agency has a minimum of five (5) full-time employees inclusive of sales, collections, compliance, and accounting staff.
- A Certification that the Agency is in compliance with all relevant federal and state laws and regulations governing the collection of debts, including but not limited to the Consumer Financial Protection Bureau, Fair Debt Collection Practices Act, Privacy Act of 1984, the Health Insurance Portability and Accountability Act of 1996, the Gramm-Leach-Bliley Act of 1999, Fair Credit Reporting Act, Telephone Consumer Protection Act (TCPA).
Notice all of the federal laws and regulations governing the collection of debts mentioned in the second bullet point. You can go through the above list and ask the agency asking if they are in compliance with all of them. How to prove that may be a little difficult. Various companies do give certifications for some of the above regulations. But choosing a member of CLLA makes this easy since any member agency must prove they are in compliance with all listed regulations.
Do They Use Skip Tracing?
Skip tracing is a common industry practice among collection agencies. When a contact can no longer be found, skip tracing is employed. Sometimes a contact can't be reached because they have moved and the information on file is incorrect. Skip tracing means tracking down an alternative contact for the person using what little information is available.
The Internet is certainly a big help with tracking people down. With more practice, agencies get better at it. Furthermore, most collection agencies use third-party software designed for skip tracing.
Are They Licensed In Your State?
Some states require collection agencies to be licensed. For larger agencies, they are licensed in all states. You can check your state's licensing requirements here.
Once you know your state's requirements, hire only an agency that meets those requirements.
Do They Have Insurance?
In the event that a business the agency is trying to collect a debt from decides to take legal action against you or the agency or both, you'll want to be sure the agency has insurance to cover such incidents. This is often referred to as Errors and Omissions or O&E Insurance. The agency may even bring other insurance to cover this scenario. Inquire about how they protect themselves and their clients (you) from such incidents.
Do They Specialize In Your Industry?
An agency that specializes in your industry will be more familiar with collecting debt from a specific type of client. With specialized knowledge about a specific industry, the agency should also have a good track record of success.
When calling the agency, ask which industry they specialize in. If they name your industry, ask them what is unique about collecting from those customers. You're basically probing to see if the agency does, in fact, have industry-specific knowledge.
What Are Their Debt Collection Methods?
Not all agencies will collect debt in the same way. Although you've hired a collection agency, to the customer they are collection from, the agency is just an extension of your company. If the agency is using under-handed or unprofessional tactics, word will get around. You know the saying - "bad news spreads fast."
The Fair Debt Collection Practices Act is meant to protect people from such tactics. Most agencies will accommodate their clients when it comes to the methods used for collecting debt. Utilizing a professional and fair collection style can uphold your business' reputation.
How Will They Communicate With You?
You'll want updates during the debt collection process. A few questions you might periodically have are:
- How many customers have you been able to speak with this week/month?
- How many are saying they will pay off their balance?
- How many have entered into a payment plan?
There are many benefits to using a collection agency to help regain unpaid debts. Before hiring an agency, having a checklist of what to look for can help in avoiding mistakes and ensuring the collection process runs smoothly.