Collection Agency Fees
Collection agencies are in the business to make money, so they’re going to charge you fees for their services. You’re in the business of getting paid for the services and products you provided your delinquent customers, so you’ll find you may need to pay for the services of a collection agency.
When you do hire a collection agency, you’re going to want to be aware of how the fees work. Collection agencies have a variety of ways of charging for the work they do. One way an agency might collect a fee is through “debt buying” where the agency purchases the debt in whole from the original creditor. The agency purchases the debt for a significantly lower amount than the debtor owes, and the original creditor gets to write off the loss on their taxes.
Once an agency purchases the debt, they go after the debtor and attempt to collect the debt, keeping the amount collected. Generally larger corporations sell their debt. Smaller organizations may find they’ll save more money by hiring an agency to collect rather than selling the debt.
Collection agencies vary greatly in their fee structure and policies. Some charge a simple flat rate for their services. Others charge a percentage of the debt collected.
While flat-rate collection agency fees may seem enticing at first, you should be very careful when considering a flat-rate agency. You may find the actual services you receive for you “small” flat-rate are far less than you originally envisioned when you hired the company. For example, you may pay a small fee and all the collection agency does is send out a specific number of letters to the debtor. That’s it. If the debtor doesn’t pay, you’ve paid for the service they’ve provided. Nothing else happens and you’re still stuck with an unpaid debt.
A flat-rate agency has no further incentive to work on your behalf once you’ve paid the fee and they fulfill their contractual agreement with you. Why should they bother?
You may also find a flat rate agency will provide only a specific set of services for a flat fee and then the additional services, which are very likely required, will cost more than originally anticipated. Of course, you’ll then find that the percentage of creditors needing these pricey additional services is much higher than you thought – and you’re among those in that percentage.
Another fee structure is the percentage-based collection agency fee. In this case, the collection agency charges a percentage of the amount collected as their fee. Since the agency’s very existence depends on their ability to perform and collect on your debt, you’re much more likely to get the full range of services from a percentage-based agency than from a flat-rate agency.
Be careful in choosing a percentage-based agency, though. You may be tempted to select an agency with a lower recovery rate because their percentage is lower. In the final analysis, however, you will very likely find the more expensive agencies with higher recovery rates will actually bring in more money than the less expensive agencies.
Carefully choose your collection agency and let the fee structure be secondary to your selection. Avoid flat-rate agencies unless you’re certain the services that agency provides for the fee are exactly what you need and no more. Don’t be afraid to go with a more expensive collection agency if they have a higher recovery rate. You’ll end up with more of your debt repaid that way.