How Your Collection Agency Can Work For You

To run a successful business you solve many puzzles: one of the hardestis to collect money from clients who don't pay their bills.

Many businesses turn to collection agencies for help. Although most of these agencies provide assistance, results often don't meet expectations:

Limitations of Most Collection Agencies

Recovery rates are not high;

Fees are substantial;

It takes you too long to receive recovered money because it goes to the agencies first.

Why Collection Agencies Don't Recover More

Nationwide, collection agencies recover only 15 to 20 percent of delinquent accounts of which they then keep 33 to 50 percent of the recovered money as the collection fee.

This low success rate is because agencies concentrate on the same things you do: age of accounts and size of balances.

Collection agencies want what creditors can't afford to give them - accounts which are still relatively easy to collect, about 90 - 120 days past due. Instead they're given accounts that are more than 242 days past due, or approximately eight months old. This is according to the American Collectors Association.

Most creditors think that it is not cost effective to give accounts to outside agencies if there is any chance of recovering them in-house instead. Only after the creditors have used their own collection skills (and failed) will agencies have the opportunity to collect these delinquent accounts.

Creditors also expect collection agencies to work small balances (less than $500), but the agencies can't afford to do that. Generally, agencies spend little time with lower balance accounts and concentrate on the larger ones in order to make a worthwhile profit.

Advantages of Fixed-Fee Agencies

If these scenarios sound all too familiar, consider using a collection agency with a fixed-fee charge instead of a percentage-fee.

Normally, the fixed-fee is a one-time charge of $20 or less per account,regardless of the size of the balance.

The fixed-fee has three main advantages:

Creditors who give large balance accounts to agencies in fixed-fee arrangements do so much earlier than when they use percentage arrangements.(These agencies do not keep large percentages of the recovered money, so they are used as soon as in-house procedures start to fail). Since fixed-fee agencies receive accounts while they are still highly recoverable, 90 - 120 days past due, recovery rates often can be double that of percentage arrangements;

Fixed-fee also means that, since their profit margin is the same regardless of account size, these agencies will place as much effort in recovering small balances as they will on larger ones; and

In fixed-fee arrangements, because the agencies receive no part of the recovered money, the money is sent directly to the creditor, not to the collection agency first. This increases cash flow.

A Tip

Regardless of whether you decide upon a fixed-fee or percentage-fee collection agency, choose one which reports to at least one national credit bureau, and preferably all three (Experian, TransUnion, and Equifax).

This article was written by Gary Winston, a collection consultant with National Credit Systems, Inc. You may contact him at winston@nationalcredit.com or Gary Winston, National Credit Systems, Inc. 11 East 36th Street, 10th Floor, New York, NY 10016. 1-800-363-7215 Ext. 1425.

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