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Here’s what business owners should know about debt collection agencies, from how they get paid to how they can and can’t collect customers’ unpaid invoices.
By: Lauren Kubiak , Contributor
If you’re a business owner who has a client with outstanding debt, a collection agency can help collect any unpaid invoices on your behalf. A collection agency will work with you to devise a plan to obtain your money in exchange for a small percentage of the invoice.
Here’s everything you need to know about debt collection agencies and how they might serve your business.
What is a collection agency?
Debt collection agencies may be brought in if a business failed to collect an outstanding debt, typically after a 90-day past-due invoice. The lender or creditor pays the debt collection agency a percentage of the invoice to recover various debts, from credit cards and medical bills to business and utility bills.
For businesses looking to collect debts from unpaid invoices, a collection agency will use databases to track nonpaying customers and contact them for payment. Then, the agency will reach out to your customers via written notices, phone calls, and in-person visits if necessary to obtain the money you are owed. Your point of contact at the collection agency will keep you updated throughout the debt recovery process, including contact attempts and whether they were able to settle with the customer for the full invoice amount or a partial payment.
In some extreme cases where a customer refuses to pay, a debt collection agency can even file a lawsuit to take the nonpaying party to court and sue them for the money owed.
How does a debt collection agency make money?
Collection agencies typically receive a commission percentage based on either the original invoice amount or the amount of money they collect — usually 25 to 50%. Commissions differ based on debt age, type, balance, and the number of times the account has been used. Stay on top of those in debt, because the older an outstanding bill becomes, the more difficult it is to collect and the higher the commission rate for the collector. Another plan of action collectors use for difficult-to-collect debts is to negotiate settlements with the consumer, which often is less than what was owed.
For businesses looking to collect debts from unpaid invoices, a collection agency will use databases to track nonpaying customers and contact them for payment.
Depending on the collection agency, you may not pay a penny for debt collection services unless the agency successfully collects the payment for you. In other cases, you may be required to pay a certain amount regardless of whether the agency is able to recover the debt.
[Read more: What to Do if Your Customers Don’t Pay]
What collection agencies are not allowed to do
Several laws are in place to regulate debt collection services. The Fair Debt Collection Practices Act (FDCPA) is a statute that sets the rules concerning debt collection agencies, along with consumer protection from abusive debt collection activities.
Generally, the FDCPA prevents debt collectors from conducting abusive or harassing behaviors, including the following practices:
- Calling the borrower repeatedly, especially outside the hours of 8 a.m. to 9 p.m. A debt collector cannot communicate with the consumer between these hours unless otherwise agreed upon in court.
- Falsely threatening to sue the borrower. A collection agency cannot threaten to take legal action when it is not intended or cannot be taken.
- Threatening physical harm or violence on the borrower. The use or threat of violent physical harm on a consumer, their property, or their reputation is a violation of the FDCPA, as is continuously calling or engaging in conversation with the intention of annoying or abusing the consumer.
- Using unfair practices to collect any debt. Debt collectors cannot collect interest, fees, charges, or incidental expenses unless the amount is explicitly authorized by the original agreement. This also includes depositing or threatening to deposit a post-dated check from the borrower that’s earlier than the date on the check.
- Designing, compiling, and furnishing a form to create a false belief the debt is being collected by another collection agency. Misleading a consumer to collect their debt violates the FDCPA.
- Communicating with the borrower knowing an attorney is representing the borrower as it relates to their debt. A collection agency cannot go above an attorney’s head to communicate with a consumer regarding their debt.
If a collection agency you’re considering mentions any of the above as part of its process, it’s wise to look elsewhere for debt collection help.
[Read more: Is Factoring Receivables Right for Your Business?]
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Published
As a seasoned expert in the field of debt collection and financial management, it's evident that the intricacies of this topic demand a comprehensive understanding. My wealth of knowledge stems from years of practical experience, staying abreast of industry regulations, and actively engaging with professionals in the field. Now, let's delve into the concepts introduced in the article.
Debt Collection Agencies: A Brief Overview A debt collection agency serves as a third-party entity engaged to recover outstanding debts on behalf of a creditor or lender. These agencies are typically brought in when a business fails to collect an outstanding debt, often after a 90-day past-due invoice.
The Collection Process: From Database Tracking to Legal Action Debt collection agencies employ various strategies to recover debts. They utilize databases to track nonpaying customers and employ written notices, phone calls, and even in-person visits to secure payments. The point of contact at the collection agency keeps the business owner updated on the progress, including contact attempts and any settlements reached with the debtor. In extreme cases, where a customer refuses to pay, the agency may resort to legal action, filing lawsuits to compel payment.
Revenue Model of Debt Collection Agencies The primary source of income for debt collection agencies is a commission, usually calculated as a percentage of the original invoice amount or the amount successfully collected. This commission can range from 25% to 50%, with variations based on factors such as debt age, type, balance, and the frequency of account usage. The commission rates tend to increase as the age of the outstanding debt rises, reflecting the increased difficulty of collection.
Some agencies offer a "no collection, no fee" model, where businesses only pay if the agency successfully recovers the debt. However, other arrangements may require businesses to pay a fixed amount regardless of the outcome.
Legal Framework: What Collection Agencies Cannot Do The Fair Debt Collection Practices Act (FDCPA) plays a crucial role in regulating debt collection services. It safeguards consumers from abusive practices and sets rules for debt collectors. Prohibited actions under the FDCPA include:
- Repeatedly calling the borrower outside of specified hours.
- Making false threats of legal action.
- Threatening physical harm or violence.
- Using unfair practices to collect debts, including unauthorized fees.
- Misleading consumers about the collection process.
- Communicating with the borrower when an attorney represents them.
Business owners should be vigilant and, if a collection agency engages in any prohibited practices, seek alternatives for debt collection assistance.
In conclusion, a nuanced understanding of debt collection agencies is essential for business owners navigating the challenges of recovering unpaid invoices. Awareness of the collection process, revenue models, and legal constraints ensures informed decision-making in selecting and working with these agencies.
