This article was excerpted from Ultimate Credit and Collections Handbook. 

As an account ages, the chances of collecting on it decrease dramatically. It's expensive to carry accounts that you will not be able to collect using the methods at your disposal. It sometimes becomes a better use of your company's time and resources to concentrate on other aspects of your business. You might do this by hiring a credit manager, to do the collection work you have been doing, but as your business grows, you may then have to place the accounts with an outside collection agency. Using a collection agency can be profitable for your business and help you grow. Some collection agencies charge more for older accounts; this is because they are much harder to collect.

A professional collection service can assist you in collecting accounts that remain delinquent. Collectors have a vast knowledge of collection techniques, technology and compliance issues. Using a professional collection service will save time and likely yield better results than you can achieve on your own.

When accounts reach 90 to 120 days past due, it's time to consider placing them with a collection agency. Some people place accounts at 60 days; some wait over a year-it is completely up to you. If you wait over a year it is unlikely you will get paid, but possible. If you are letting something sit on your books and grow older without actively pursuing it, it is worth it to give it to a collection agency. It's not going to get collected if you keep it, and the percentage you will pay the agency will be well worth it.

Look for the following signs that indicate that you may need to work with a collection agency:

  • A new customer does not respond to the first letter. For some unknown reason, the consumer will not or cannot pay. Potential losses could be kept to a minimum by prompt referral to a collection agency.
  • Payment terms fail. In some cases irresponsible consumers pay when and if they want to. This group is responsible for 25 to 50 percent of the cost of collections. Cost and potential losses are reduced by quick action.
  • The consumer makes repetitious, unfounded complaints. Such consumers are often better handled by a collection agency. You have to decide if this is worth your time or would you rather pay an agency a small percentage for that time and still get paid.
  • The consumer totally denies responsibility. Without professional help, these accounts are usually written off as total losses. This is when it is good to have a signed credit application or contract and also, if possible, proof of the order and who placed it.
  • Delinquency coexists with serious marital difficulties. These also require professional collection help, with the added urgency of obtaining payments before the disappearance of one or both of the responsible parties. If divorced people say the other is responsible, get a copy of the divorce decree, which will state who is responsible.
  • Repeated delinquencies occur along with frequent changes of address or jobs. This group is responsible for 90 percent of all "skips." A skip is a consumer who has moved without informing creditors or leaving a forwarding address. The chance of finding a consumer and collecting a debt will decrease over time, so quick action is important. Most agencies provide a skip-tracing service.
  • Obvious financial irresponsibility is apparent. In such cases, little hope exists for voluntary payments and a quick settlement.
  • There is an unauthorized transfer or disposal of goods delivered in a conditional sales contract.

Working With a Collection Agency
Once you decide on a collection agency, use their forms to list accounts or their format to upload accounts electronically. Give as much information as possible-accurate information about the account will improve collections.

In all cases, the minimum information should include:

  • The correct name, address and telephone number of the debtor
  • Name of the debtor's spouse, if applicable
  • Whether mail has been returned
  • Debtor's and/or spouse's occupation or last known occupation and phone number
  • Names of relatives, friends, neighbors and references
  • Summary of any disputes
  • Date of last transaction, order or payment
  • Cellular phone, fax, e-mail address
  • Nicknames or aliases, maiden name

If you have had all new customers fill out a credit application, all of the above information should be listed on there. The summary of disputes would be in the computer notes for the customer's account. This makes it very easy--all the information you need, basically all in one place, on one piece of paper. This is one of the reasons why a credit application is so important. Cooperate with your collection agency. Rely on their experience, diligence, and judgment for the best and quickest results and promptly refer any contact from the debtor to the collection agency. Make sure that your collection agency is familiar with the nature of your goods or services--some agencies even specialize in collecting on specific services. For example, you might find an agency that only collects on delinquent auto loans, or medical bills, or hot tub sales. If you find an agency that specializes in your field, check them out; there is a reason they only do those types of collections. Don't place any accounts with more than one agency. Make sure that if you change collection agencies, the accounts are only being worked on by one agency. Collection agencies' fees are based on results, not on time spent on the account. Don't expect payments to be made immediately.

How Collection Agencies Get Paid
Most collection agencies charge a commission or percentage based on the many factors of the accounts they are trying to collect. Some agencies charge a flat monthly fee, and some charge per letter or call.

If an agency charges a commission, it will normally be a percentage for "standard" accounts. That would be accounts that are maybe 60 days old, have a good address and phone number, and the debt is probably collectible. My collection rate was 25 percent when I owned my agency. That was for everyday accounts my clients placed. If they had an account that was under $75 or over one year old, I charged a 50-percent commission. When I had a large client placing many accounts weekly or monthly, I would give them a special flat rate of 18 percent on all accounts across the board.

Some agencies will charge a flat monthly fee based on the number of accounts you place, how frequently you place them, the dollar amounts, and age. They also may charge per letter or per phone call and let you decide the frequency of each. Collection agencies may also offer other paid services at a flat fee. Check out their websites and compare to see what the average fee structure is and what works for you and your business.

HowItWill Affect Your Business
If you decide to turn your delinquent accounts over to a collection agency, be prepared for the customer to call you. This doesn't always happen, but it has been my experience that they will call the business owner to try to work something out once the account has been placed with an agency. Once you place the account with an agency, all contacts must be referred back to the agency. If the debtor calls you, explain to them the account is with a collection agency and they have to call them. You can always brush off the discomfort of the call by saying, "My bookkeeper, accountant, (anyone but you) is handling my accounts and the policy is anything over 60 days is placed for collections." Once you hang up, e-mail or call your collection agency and let them know the debtor contacted you. If you receive mail or payments from the debtor, forward them to the agency.

Sometimes a customer will come back to you for services or products after they have paid a collection agency. Do not extend credit to this customer. Once you place an account with a collection agency, only accept cash payments up front. That customer cost you money when they didn't pay their bill; if they continue to purchase from you and have to pay cash, you might recoup your losses.

Collection Agency Payments and Updates
Most collection agencies send payments once a month and some twice a month. Quite a few agencies even offer online updates on the payments and status of your accounts that they are working on. You no longer have to wait a month to find out who paid; you can search online or even call for an update. Some business owners don't understand when they place accounts with a collection agency, that doesn't guarantee the debt will be paid and the agency certainly never guarantees a time frame for it to be paid.

When I owned my agency, I would have business owners place accounts with me and start calling me the next day to find out the status of the account and if it was paid. You have to remember, any money collected for you is money you thought you would not be able to collect without effort and time on your part. So once you place accounts, give the agency some time to process and work on the account. Agencies also have to give the debtor 30 days by law to request verification of the debt and/or dispute the debt.