When is it Time to Engage a Collection Agency?
After an account has been overdue for more than 60-90 days, sending additional reminder invoices or making in-house calls tends to be ineffective.
If a customer hasn’t paid after two to three billing cycles, it’s highly unlikely that they will do so any time soon. At this point, engaging a collection agency becomes a far more practical, economical, and effective option than continuing in-house recovery efforts.
FACT: A collection agency can send five collection demands for $15 ( $3 per demand), while in-house costs between $16-$30 per demand (a minimum of $80 for five demands) when all costs are factored in.
Where do these numbers come from? Sterling Commerce found that the cost of processing paper-based invoices averages $30 per invoice once you factor in all in-house overheads. According to David O. Willis in his book “Business Basics for Dentists,” estimates place the total cost of sending a single bill at $16.00. |
Collection Agencies Offer a Broader Range of Services
Collection agencies take collection activities to a completely different level. For every account, they ensure:
- Compliance with all federal and state regulations
- The ability to counter every excuse a debtor offers
- Free bankruptcy screening
- Free credit bureau reporting
- Free change of address check
- Litigious defaulter check
Comparing In-house Recovery Costs with Collection Agency Services
There are two primary services offered by collection agencies:
- Collection Letters: These written demand notices are sent to the debtor, sometimes accompanied by automated collection calls.
- Collection Calls: In this service, a professional debt collector personally calls the debtor multiple times.
In-house Invoices vs. Collection Agency Letters
Do you think collection agencies make a lot of money by sending collection letters? Surprisingly, not much! Collection letters have razor-thin margins, and not all agencies even offer this service.
Advantage #1: Cost Efficiency
The cost of sending demand notices through a collection agency is significantly lower. Engaging in-house staff to send a single invoice costs between $16 and $30, factoring in everything like staff time, stationery, printing, mailing, software, and office space. Even with an efficient in-house team, sending five contacts per account would cost a minimum of $50 per account, and often much higher.
Collection agencies, on the other hand, can offer five collection letter demands for around $20 or less per account. If larger batches of accounts are handled, the cost can drop to as low as $12 per account.
Advantage #2: Added Scrubs
Collection agencies perform additional checks like “Change of Address” and “Bankruptcy Scrub,” services that in-house staff cannot access or would cost extra. These scrubs ensure you’re pursuing debtors who can actually pay.
Advantage #3: Increased Pressure on Debtors
A collection agency’s involvement puts more pressure on the debtor than internal business contacts. The use of an external agency increases the chances of repayment.
Advantage #4: Legally Approved Communications
Collection agencies send attorney-approved letters, maintaining the right balance between diplomatic verbiage and legal pressure—something in-house teams may struggle to achieve.
In-house Reminder Calls vs. Professional Collection Calls
Professional debt collectors spend their entire day negotiating with debtors and use sophisticated techniques to recover debts. While in-house employees may have the advantage of requesting payment immediately after it’s due, collection agencies bring a higher level of expertise to the table.
However, it’s important to note that a debt collector must allow a 30-day dispute period for individual debtors after the first demand, while in-house employees do not face this restriction. This makes it ideal to transfer accounts for collection calls after 90 days of non-payment or after sending multiple collection letters.
A debtor who hasn’t paid for 90 days will often only respond to professional collectors.
Conclusion: Why Collection Agencies Are More Cost-Effective
Collection agencies have their own overheads—licensing, insurance, bonding, staff salaries, contractor commissions, software, and more. Yet, they are able to offer lower-cost services because they handle high volumes of debt. By outsourcing collections, you not only lower your staffing costs but also eliminate the need for debt recovery training.
It’s important to let collection agencies handle what they do best—collections! Many businesses are concerned about sharing customer data with agencies, but most collection agencies employ strict data encryption and safety protocols to protect this sensitive information.
Bottom Line:
If an account has been overdue for 30-120 days and your in-house calls or invoices haven’t resulted in recovery, it’s time to assign the account to a collection agency. A good agency will start with first-party demands, move on to third-party demands, and then escalate to collection calls if needed. They may even file legal suits if it comes to that.
From banks, credit card companies, car dealerships, doctors, gyms, to small business owners, and even the US government, collection agencies have been a tried and tested method for recovering past-due accounts. If this model works for them, it can certainly work for your business!