Choosing a Collection Agency

It is practically unavoidable. If you extend credit, you will eventually have some customers who don’t pay their bills. And after you finally tire of listening to their excuses — or cursing their uncanny ability to avoid your phone calls — you will think about contacting a collection agency.

No shame in that — businesses do it every day. In 2007, the latest year for which data are available, the collections industry recovered $51 billion on behalf of clients, keeping $11 billion in commissions and netting $40 billion for the creditors who hired them. Good collection agencies have the time and expertise to recover outstanding debts that your small business may not.

Contrary to popular perception, there are plenty of good bill collectors out there. While the occasional bad actor gets the headlines, less than 0.01 percent of all collection contacts end in complaints to state or federal regulators or the Better Business Bureau, according to ACA International, a Minneapolis, Minnesota-based industry trade group.

With a little due diligence, you can find a good one. But it helps if you act promptly. “Time is the weapon of the debtor,” explains Martin Sher, president of ACA International and co-owner of AmSher Receivables Management, a collection agency based in Birmingham, Alabama. “The longer time goes by, the greater the chance that a debt is not going to be collectible.”

Finding a reliable agency

Once you’ve committed to the idea of hiring an agency, you can ask for referrals from your accountant, your attorney, or business contacts you might have in your trade organization or local Chamber of Commerce. Or you could visit the ACA International website, where you can search through its 3,200 member agencies by city and state. Each of the organization’s members is required to pledge adherence to its code of ethics.

Next, find out if the agency is a good fit for your business. Ideally, you want an agency that has done work for other companies in your industry involving the same types of debts. While bigger firms often handle both commercial and consumer debts, many agencies specialize in one or the other, and often specialize in certain industries, too.

Also check to see whether the company is licensed to operate in all 50 states. If you’re trying to collect from one local customer, it’s OK if the agency is only licensed in your state. But if your debtor or debtors are crossing state lines — or have businesses or residences in other states — you’ll want an agency authorized to go after your money in those areas.

Once you’ve confirmed that an agency is a good fit, visit it. Talk to the owners and the customer service representative who will be your contact, ask about their background, listen to collection conversations, and check out the agency’s technology. “If you can see something, you can understand it better,” Sher says.

Ask for references from the agency, too. Ideally, you want a list of all the agency’s clients operating in your industry, not just a handful the agency has cherry-picked.

Is it worth the investment?

Finally, it’s time to talk about price. Collection agencies work on a commission basis, retaining some percentage of what they collect. Counterintuitively, the agency quoting the lowest rate, or “contingency fee,” may not be the best bargain. If that low fee means the firm devotes less time, energy and technology to pursuing your past-due debts, it may collect less, minimizing your net recovery.

Think of it this way: You’d rather pay a 20 percent contingency fee to someone who collects $100,000 of your past-due debts than a 10 percent fee to someone who only collects $20,000.

In practice, contingency fees vary dramatically depending upon the type of debt you’re asking an agency to collect and its age. The fee could be as little as 10 percent for a big-balance debt that’s put into collections early, Sher notes, and as much as 50 percent or more for older, smaller debts owed by subprime borrowers.

“Ask the agency what they think would be a fair price and what they will do to get the highest possible recovery rate,” Sher says. “Most want to charge you the exact right rate so you’ll stay with them and be a long-term client.”

After you’ve settled on an agency, strive to develop a good working relationship with it. “When you hire a collection agency, you’re hiring a business partner,” Sher says. “Smart clients meet with their agencies, discuss any issues that arise, provide them with any information they need, and give them feedback.”

After all, the more they succeed, the more money you return to your pocket.

A former reporter and editor for Dow Jones, where he wrote for The Wall Street Journal and Barron’s, Randy Myers is a contributing editor for CFO and Corporate Board Member magazines.