Collection Agencies

A collection agency is a company used by creditor companies to collect on past due balances.  Each agency offers different services and features.  Selecting the right third party collection agency requires careful consideration.  Most creditors consider a variety of factors when selecting a third party collection agency.  Among the most common factors considered are:

• The reputation of the collection agency,
• Their experience,
• Their geographical reach,
• Their collection fees,
• The ease with which creditor companies can do business with the collection agency.

Collection practices vary by companies so it is always advisable to speak with other credit managers or your local credit association before first using any new commercial collection agency. The majority of past due accounts may be brought out of arrears with consistent in-house collection efforts. There may be an extraordinary reason for the payment delinquency.  Once addressed, the account's profitability and/or cash flow can be restored.

Certain collections may require another course of action. Businesses experiencing overdue accounts may seek assistance from a third The rules of due diligence apply to the selection of a collection agency as much as to the choice of distributors and agents. Additional caution should be exercised when selecting a collection agency for high dollar balances owed.  It may be best to hire an attorney because the total cost will be lower than the agency's continent collection fee.  Please note that most agencies have relationships with attorneys that specialize in debt collection.  Often the contingent collection fee increases only slightly if it becomes necessary to refer an account to one of these attorneys.

Collection agencies normally work on a contingent fee basis, meaning they are paid commissions only if the agency collects money for you.  Therefore, it is important to let the collection agency do its work.  Once an account has been placed for collection, it is important for creditors not to negotiate directly with the debtor.  It is reasonable to believe that the only reason a debtor would contact a creditor after it has been placed for collection, the most likely reason the debtor is calling is that the debtor is hoping to negotiate a better deal with the creditor comtany than it can with the collection agency. 

The simple way to measure the performance of a collection agency is by calculating the Collection Ratio.  The formula is:   

Cash Received from a Collection Agency / Total Accounts Receivable Placed with the Collection Agency 

Edited by Michael C. Dennis & Michael Zininberg.  Michael Dennis is a consultant and author of "The Credit and Collection Manager's Concise Desk Reference."  He can be reached by email at mcdennis13@yahoo.com