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Choosing a Commercial Debt Collection Agency

By Michael C. Dennis, MBA, CBF
Republished in the February 2004 edition of Business Credit Magazine and reprinted here by permission

There are a number of excellent national and regional commercial collection agencies. Out of respect for those I do not know, I will not name any in this article. The things to look for in a collection agency are:

1. Performance, performance, performance! Realistically, we all know that by the time we place an account it may very well be (DOA) Dead on Arrival when we submit it. Nevertheless, you should monitor the performance of the agency or agencies you use.
2. An opportunity to meet face to face with a representative of the agency at least quarterly to discuss their performance level, your goals, your expectations, and their collection efforts.
3. Prompt and accurate reporting of the agency’s collection efforts, and prompt reporting return of all payments received from a debtor company.
4. The collection agency is not reluctant to recommend that the matter be placed in the hands of an attorney if the debtor refuses to work with ‘your’ agency. The threat of referring an account to an attorney to file suit may be the only way to extract payment from an uncooperative debtor.

Most credit managers receive sales calls from collection agencies on a regular basis. If you are serious about establishing a relationship with a new collection agency, it should be unnecessary to take an adversVerdana stance or haggle with an agency when discussing contingent collection fees [collection rates]. A key element of the credit department's relationship with a collection agency is mutual respect. If that respect is not evident when the collection agency quotes fees [for example, when a collection agency quotes a fee structure rate that is above the going rate] there is little reason to continue the discussion.

When you discuss a relationship with a third party collection agency, you should try to:

• Deal from a position of strength. Remember that there are dozens if not hundreds of commercial collection agencies to choose from.
• Make certain that the agency understands that if a large claim is placed you will ask them to quote a rate below their standard contingent fee structure.
• Ask how small a claim the agency will accept.
• Not get too "chummy" with the salesperson. Doing so might make it difficult for you to remain objective.
• Question the experience and level of expertise of the collection agents that will be charged with servicing your account placements. The salesperson soliciting your business is not necessarily representative of the level of professionalism and proficiency among other employees of the collection agency. The company’s collectors have to be able to do their jobs effectively in order to improve the chances of recovery on accounts placed for collection.

Collection Agency Do’s and Don’ts Do not place an account with a collection agency to get the agency “off your back.” Exactly the opposite is likely to happen. You will probably get more calls from the agency asking for more of your collection business, not less. Do ask the agency for customer references, and check them. Do not spread your business among too many agencies. Most creditors use no more than two collection agencies. Remember that the more business you give any one agency the more important your company is to that agency and the more responsive it will be to your questions, comments and concerns. Do be aware that some agencies will quote a low initial contingent rate, make a handful of calls or send a few demand letters, report the debtor is uncooperative and recommend the account be placed with an attorney. The "catch" is that the contingent collection rates for ‘their’ legal service are higher than the creditor should have to pay. Do require the collection agency to get your written approval before [a] offering or accepting a compromise of a lesser amount as payment in full, or [b] proposing or accepting a payment plan, or [c] referring an account to an attorney. These are not the kinds of decision that should be delegated to a third party. Do not base your decision on price alone. Experience, professionalism, effectiveness and honesty are important factors to consider. Do ask for the collection agency’s contingent collection rate in writing.

Some general rules for choosing a commercial collection agency include:

• Work only with collection agencies willing to work on a contingent collection basis
• If you sell nationally, deal with an agency with a national presence. If you sell regionally, you may find a smaller local agency gives you better service.
• Make certain that the agency is licensed and bonded.
• Be sure there is a written agreement with the agency specifying items such as:
  • The basic contingent collection rate or fee structure
  • What happens if the debtor remits payment during the free demand period
  • How the agency will be paid if the debtor proposes a return of product to satisfy the debt
  • The rate if the account must be placed with an attorney
  • How soon you will receive payment once the collection agency receives payment from the debtor
  • What happens if the debtor company files for bankruptcy protection

Not all collection agencies work the same way. Some collection agencies approach debt collection by generating a series of progressively more strident dunning notices. Other agencies combine dunning notices with phone calls to delinquent customers. Other collection agencies combine dunning notices with phone calls and unannounced personal visits to the debtor’s place of business. As a rule, agencies that only send dunning notices are less effective than agencies that call customers. Agencies that call debtors may be slightly less effective than collection agencies that visit customers to discuss past due balances face to face – but these collection agencies may charge a premium for this type of service.

Therefore, before selecting a collection agency you need to know how they go about the collection process. You need to measure the rate quoted against the manner in which the agency goes about the collection process and factor in the chances of success using this collection method. Thus, the agency that offers the lowest fee may not be the agency that offers the ‘biggest bang for the buck.’

A final thought: Since most of the recipients of Business Credit Magazine are NACM members, chances are good that they are aware of or a member of a NACM local affiliate association. Many local affiliates have in house collection services available to members. Because they are member owned, affiliates can offer very competitive contingent collection rates. Some of advantages of using a NACM affiliate association’s collection division include instant credibility, honesty, trustworthiness, professionalism, and the fact that your local affiliate is not likely to ‘hound’ you for more business. In addition, the local affiliates’ collection divisions work closely together to provide effective nationwide services to member companies.