How to send someone to collections: Guide, rules, and how to avoid

You work hard for your sales, but unpaid invoices can stall your momentum. In fact, a QuickBooks survey revealed that over half of small business owners (54%) have sacrificed their own paychecks to cover business expenses.

This lack of cash flow doesn’t just hurt your pocketbook; it puts your entire business at risk. If proactive follow-ups aren't working, your last resort may be a collections agency. It’s a tough choice, but often a necessary one. Before you start the process, here is the terminology you need to know:

In this post, we’ll go over 9 steps to follow if you decide to send someone to collections. Let’s start with doing your part to collect payment.

1. Exhaust your internal recovery efforts

Before involving a third party, a small business should make every reasonable attempt to settle the debt and collect the outstanding payment. This preserves the customer relationship and ensures you keep 100% of the recovered funds. Effective internal recovery is built on clear documentation and consistent communication.

Some things to consider when contacting the debtor include:

• Document everything: Keep a chronological log of all invoices, payment history, and communication attempts, including dates, times, and summaries of calls.
• Layered communication: Start with automated email reminders 5 days before a due date, followed by a direct phone call 15 days past due.
• The formal demand letter: If an invoice hits 60 days past due, send a formal letter via certified mail. This serves as a final warning and is often required evidence if you later go to court.
• Offer a settlement: Sometimes receiving 75% of a debt immediately is better for cash flow than 100% of a debt six months from now. Offer a one-time discount or a structured payment arrangement.

2. Understand the collections process

Debt collection is the process of attempting to recover unpaid debts or invoices—in small businesses, it would mean trying to recover unsettled debts from customers.

Here are some of your options:

• Invoice factoring: This involves selling current unpaid invoices to a third party to get immediate cash flow. This is a financing tool rather than a collection tool.
• Hire an agency: They pursue the debtor. You still own the debt, and the agency takes a percentage of what they find.
• Debt buying: You sell the charged-off debt to an agency for a small fraction of the total. They now own the debt, and you are no longer involved.

Generally, small businesses take internal steps to collect unpaid debt from customers, like sending timely invoices and reminders or connecting with customers via phone or email. However, due to potentially limited resources and legal compliance, the business cannot continue trying to reconcile the debt after a certain time.

3. Meet legal requirements and regulations

When deciding to send someone to collections, you must consider and adhere to the legal requirements and regulations. Otherwise, you could face costly penalties, reputation damage, and other legal action.

The important things to understand:

• The Fair Debt Collection Practices Act (FDCPA): This federal law prohibits harassing behavior such as calling before 8 a.m. or after 9 p.m., using profanity, or contacting a debtor’s employer except to verify location.
• Statute of limitations: You cannot legally sue for a debt that is too old. Depending on your state, this window is usually 3 to 10 years. After this time expires, an agency may still contact the debtor, but legal recourse is limited.
• Debt validation: Under the law, if a debtor disputes a debt in writing within 30 days of your first notice, you must stop collection efforts until you provide written verification of the debt.

When making this decision, it’s best to consult your legal team on state-specific collection laws, which can vary but often offer more protections for debtors than creditors. Some laws that vary by state include prohibited collection tactics, so it’s best to be well-versed in these before attempting to collect an unpaid debt.

Additionally, having required documentation, such as original invoices, payment histories, and communication records, is also a requirement before sending someone to collections, as this will need to be given to the collections agency to validate the debt and meet their legal requirements.

4. Know the cost of using collection agencies

Hiring help isn't free. You must perform an ROI calculation to see if the debt is worth the effort. If the debt is small, it may be better to write it off for tax purposes.

Exploring the cost of using collection agencies can be done anytime for practical knowledge, not just when a debt is owed. While using a collection agency seems like a great way to even partially satisfy overdue invoices, this procedure doesn’t come without a cost. Learning how much it costs to send someone to collections is crucial before making the decision.

Common fees and costs associated with using a collection agency include:

• Contingency fees: Most agencies charge contingency fees, which are a percentage of the total amount of debt they recover. This amount is usually 20% to 50% of the total debt amount.
• Flat-rate fees: Some agencies choose to charge a flat fee regardless of the recovery amount. These fees mostly range from $15 to $25 or more, regardless of the debt amount.

ROI calculations include the potential return amount, the overall cost of using the collection agency, the fee amount, and the likelihood of getting the return.

5. Weigh the pros and cons of collections

Sending someone to collections is a major step. Consider the long-term impact on your brand versus the short-term need for cash.

The benefits

• Expertise: Agencies have skip tracing tools to find debtors who have moved or changed numbers
• Standard setting: It signals to other clients that your payment terms are serious
• Legal protection. Professional agencies handle the FDCPA compliance for you

The drawbacks

• Brand damage: You will almost certainly lose that customer forever
• Reduced recovery: After agency fees, you may only see half of the original invoice amount
• No guarantee: If the debtor has no assets or files for bankruptcy, the agency cannot force payment

6. Pick a collection agency

After you decide to send an account to collections, you must choose a collection agency. There are many small business collection agencies to choose from, and you’ll want to pick one you’re confident in to recover your unpaid invoices. To help make the best decision for your business:

• Evaluate agency credentials by reviewing the number of years in business, overall success rate, and industry specializations.
• Check licensing and certifications to ensure state compliance, in addition to industry affiliations.
• Understand fee structures, noting transparency, room for negotiation, and any hidden fees.
• Read reviews and testimonials from other businesses in your industry to understand how operations work.
• Verify compliance practices with the BBB, thoroughly checking the agency’s reputation.

7. Manage special circumstances and edge cases

Debt collection often involves complex scenarios that require specific legal responses. Understanding these common hurdles can help you set realistic expectations.

What happens if the debtor files for bankruptcy?

Filing for bankruptcy triggers an automatic stay. You and the agency must legally stop all collection efforts immediately. You will need to file a proof of claim with the bankruptcy court to be included in any eventual payout.

Can international debts be sent to collections?

International debts can be sent to collections, but the process is more complex.You will need an agency with international affiliations as they must navigate the specific consumer protection laws of the debtor’s home country.

Can you send multiple debts from the same person to collections?

Multiple debts from the same person can be sent to collections at the same time. However, they must be treated as separate line items. You cannot bundle them into one giant debt if they originated from different contracts or time periods.

What happens if the agency cannot locate the debtor?

When a debtor cannot be located, agencies use skip tracing to find new addresses or employers. If the debtor truly has no assets or income, the agency may eventually write off the debt, which allows you to claim it as a loss on your taxes.

8. Maintain best practices through the collection process

Even if you hand an unpaid invoice over to a collections agency to handle, you’re not entirely done with this account yet. Now, you’ll want to shift your attention to your communication with the collection agency for optimal debt recovery.

Common best practices include:

• Maintain accurate records. Keep all agency reports for at least seven years, as you may need these for tax audits regarding bad debt write-offs.
• Follow legal guidelines regarding Fair Debt Collection Practices Act (FDCPA) laws.
• Understand timeline management with regular reporting, knowing that every account will vary in time to close.
• Cease direct contact. Once you've hired an agency, don't contact the debtor yourself. This prevents conflicting messages and potential harassment claims.

Can you still accept payment directly from the debtor?

Accepting payment directly from the debtor is not advisable once a collections company is involved. They are the point of contact from that moment forward. Accepting direct payments can lead to miscommunications and legal issues. If a debtor sends you a check directly, notify the agency immediately so they can credit the account and collect their agreed-upon fee.

9. Prevent future collection issues

While you might not be able to prevent every circumstance leading to unpaid invoices, there are some steps your business can take to help customers pay invoices faster and minimize future collection issues.

Take the following actions to help secure payment on invoices quickly so that you don’t have to send someone to collections:

• Have credit-check procedures in place for new customers, especially if the invoice will be significant or recurring.
• Provide clear payment terms that specifically lay out due dates, late payment fees, how to dispute charges, and any consequences of nonpayment, including forwarding to a collections agency.
• Establish early intervention strategies, such as automatic reminders and early payment discounts, before an account becomes severely delinquent.
• Provide multiple payment options for ease of access, like QuickBooks payments, online payment, ACH transfer, payment app transfers, and credit card options.

Choose the best payment setup for your business

Your goal should be to avoid the collections process whenever possible. It is essential to keep your business’s cash flow running smoothly, and having unpaid invoices can cause unnecessary hurdles.

A QuickBooks Line of Credit can help you bridge the gap in your cash flow if accounts become delinquent, so you can still operate your business smoothly while sending someone to collections.

QuickBooks Payments: QuickBooks Payments account subject to eligibility criteria, credit, and application approval. Subscription to QuickBooks Online required. Money movement services are provided by Intuit Payments Inc., licensed as a Money Transmitter by the New York State Department of Financial Services.

For more information about Intuit Payments' money transmission licenses, please visit https://www.intuit.com/legal/licenses/payment-licenses/.