When deciding whether to partner with a collection agency, one of the first things most businesses ask is, “How much will it cost?” Collection agency fees may vary by each firm, but there are a few common factors across the industry.
Types of fees
Traditionally, collection agencies charge contingency fees, or a percentage based on the amount of money they are able to recover. This is common practice among most collection agencies.
If you engage debt collection services earlier in the collection process, agencies may offer to make collection calls and send letters to your customers on your behalf. In this case, the agency may charge a per-call or per-letter fee. This arrangement can be referred to as a “pre-collect” program. For example, the agency will call and send letters on your company’s behalf before accounts reach 90 days of age, charging per-call and per-letter fees. After 90 days, any accounts with remaining balances will automatically enter the traditional collection process, and the agency will begin charging contingency fees based on how much they collect.
How fees are determined
Contingency fees are determined based on a number of factors, including:
- Age of the debt: The older an account, the harder it is to collect. Agencies will typically charge a higher contingency fee the older the average age of your accounts.
- Volume of accounts you place: As a rule of thumb, the more accounts you place, the lower the contingency fee.
- Type of debt: Collection is more difficult in certain industries, and the contingency fees will reflect that. For example, it’s generally easier to collect for a private physician’s office than a utilities company—most consumers will only fail to pay their water and electricity in times of dire need. Thus, they will be harder to collect from.
- Length of the relationship: The longer you stay with an agency, the more likely they are to offer you a lower contingency fee. Agencies want to keep loyal clients.
Most agencies do not typically charge fees for implementation, reporting or cancellation of services (unless bringing you on requires a major infrastructure change or some other special case).
However, some extra fees may apply if you decide to pursue legal action against a debtor. Some collection agencies will hire an attorney and manage the process on your behalf. You may be asked to front the court costs and pay a higher contingency fee on the account in question, in order for the agency to compensate the attorney. Since experienced agencies will only recommend legal action if they believe you have a good chance of winning and recovering the debt, these fees are usually worth the initial out-of-pocket cost.
The cost of outsourcing debt collection will vary by agency and depending on factors such as age and volume of your accounts. Before you select a debt collection partner, be sure to ask about their contingency fees and any additional costs.