Third-party collection agencies recovered approximately $44.6 billion in post-commission debt in 2010, according to a study done by Ernst & Young [PDF]. In many cases, businesses would have written off that money if it weren’t for the collectors’ efforts.
Using a debt collector has some obvious advantages, but you should be aware of the disadvantages, too. Let’s take a look at a few pros and cons.
- Debt collectors can collect when you can’t. Delinquent debtors may not respond to your collection efforts, but put a professional on the job and the bills often get paid. According to Barney Zeng, senior vice president and general manager of Transworld Systems, 80 percent of debt that’s collected within the first 30 days is done so by the original creditor, but once the debt becomes delinquent, a professional debt collector has the advantage. That’s because they’re generally more consistent and assertive, he notes. The Huffington Post says that the collection industry has about a 20 percent recovery rate on delinquent debt.
- Debt collectors free up your time and resources. “Debt collection can be very time-consuming,” Zeng notes, “especially for the small-business owner who would prefer to practice their chosen profession. Contacting slow-paying accounts means sending letters and making phone calls.” He says that you’ll have to make a lot of calls and leave a lot of messages, and to complicate things, most people have caller ID, which makes it tricky if they’re trying to avoid you.
- Debt collectors have tools that you don’t. Effective debt collectors use advanced tools to help locate and communicate with debtors, using new telephone technologies and third-party sources that grant access to debtor information, Zeng says. In addition, they are in constant communication with debtors through written and verbal means.
- Debt collectors charge a hefty fee. You’ll pay to have your delinquent accounts professionally collected, but Zeng says that most collection agencies charge a contingency fee — or a percentage of what they collect (from 25 to 50 percent for small businesses, depending on the type of debt). But he stresses that the fee shouldn’t be your only consideration: You should look at the return on your investment, references and referrals for the collection agency, and the amount of convenience it offers. For instance, does the agency have a website equipped with the reports you need? “If you pay a slightly higher fee rate, you might be getting more money collected,” Zeng says. “Said another way, a lower fee rate on zero dollars collected is zero.”
- Debt collectors may affect client relations. A debt collector who lacks communication skills may create ill will between you and your customer. Just because a client is in a financial bind today doesn’t mean that he won’t come back strong in the future. If he’s been treated rudely by someone who represents you, he’ll likely look elsewhere for his needs. Zeng says that debt collectors should “always comply with regulations and be respectful.” His company even sends a thank-you letter to debtors who pay up. But realistically speaking, any account turned over to a debt collector is unlikely to return to you for future business.
- Debt collectors may get you into trouble. Collections for business accounts are not governed by the Fair Debt Collection Practices Act [PDF] — the law that dictates how agencies can collect from consumers. But there are laws and regulations that business debt collectors must follow; every state has its own set of rules. Depending on the situation, Zeng says, an original creditor may be held responsible if the collection agency breaks the law in its collection efforts. For instance, a collection agency must be properly licensed in the states or jurisdictions where it tries to collect, he says. To protect yourself from anything negative a collector might do, he advises that you ask for a hold harmless agreement in your contract with the agency.