The debt collection approach is significantly different for Consumer and Commercial collections.
Consumer Collections Cost (B2C Recovery)
Collection agencies offer four types of debt recovery services. It is recommended to start from Step 1 and then gradually move to the next steps till your debtor pays. There is no restriction that you must start from Step 1. You can start from any of the Step of your choice.
- STEP 1: Pre-collection (Fixed Fee Service ~ $15 per account)
Five contacts (or reminders) are made to the debtor bearing your company name. Although the collection agency sends these reminders, technically this account is not yet in collections. Debtors are instructed to make payments to you directly. These contacts tell the debtor that if the account is not paid-off, it may be moved for collections. This is a fixed-fee service, and these five contacts cost about $15 per account. Two contacts are made by phone, and three are sent by USPS mail over 30 days.
- STEP 2: Collection Demands (Fixed Fee Service ~ $15 per account)
This is very similar to Step 1, but now all five contacts are made bearing the Collection Agency’s name (not yours). All five collection demands are sent by USPS mail (no phone calls). With each demand, the intensity increases. Your debtor clearly understands that his account has been forwarded to a collection agency, and things are much more severe now. The cost per account is the same, roughly $15 per account. Debtors are instructed to pay directly to you. If you select both Step 1 + Step 2 service ( also called COMPLETE service), the cost of these contacts drops to about $20 for all ten contacts.
- STEP 3: Collection Calls (Contingency Fee ~ 40% of the amount recovered)
No more soft collections. In this step, a professional debt collector will make collection calls to your debtor. He will attempt to resolve this debt amicably, and if things do not work he will make his approach firm (to a level the law allows). He will not threaten your debtor, but debt collectors know how to put the right amount of pressure to get this debt paid off. Over the next few days or months, the collection calls continue. Some debts get resolved in weeks and others may take even one year. You keep 60% of the amount collected, and the Collection agency keeps 40%. No recovery – No Fee. Not all accounts assigned get paid, but debt collectors are contractors (not employees), so they do not get paid a penny unless they collect. They obviously work hard to collect money for you. A debt collector uses several tools like Skip tracing and Bankruptcy screening to optimize his approach. He may even report this debt to Credit Bureaus if permitted by you.
- STEP 4: Legal Suit (Contingency Fee ~ 50% of the amount recovered)
This is the last resort. This step is recommended only if an account remains unpaid after numerous collection efforts and the balance is high enough to justify the legal costs. The contingency collection fee varies depending on the complexity of the case.
Commercial Collections Cost (B2B Recovery)
Unlike B2C collections, most accounts of type B2B are directly handled by a debt collector specializing in commercial debt recovery.
Most commercial debts carry higher balances, B2B collection fees are lower than B2C collections. B2B is also a contingency-based collection service, costing 10% to 40% of the amount recovered. No recovery = No Fee.
Due to the complexity of collecting older debts, they typically attract higher fees. Moreover, accounts with smaller balances usually carry higher fees because they result in relatively lower profit margins for the collection agency.
You can check more about Commercial Collections here. The following table will give a rough estimate of B2B collection costs.
Commercial Contingency fee (Based on Account Age and Amount Assigned) | ||||
Age: If > 1 year | 40% | 35% | 30% | 25% |
180 days – 1 year | 35% | 30% | 25% | 20% |
90-180 days | 30% | 25% | 20% | 15% |
< 90 days | 25% | 20% | 15% | 10% |
Amount Assigned -> | $500- $5k | $5k- $20k | $20k- $100k | $100K + |
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Note: Go for a better Agency. Not the cheapest one
Let’s do some Maths:
Collection Agency “A” charges $15 and can collect $500.
Collection Agency “B” charges $20, works harder, and collects $750.
Which one will you select?
>> Agency “B” <<
Collection costs of various agencies do not vary significantly, but performance does.
Some agencies genuinely charge more since
– Their services are superior.
– They hire better debt collectors.
– To not give up on your accounts easily.
– They invest in the technology to keep your and your debtor’s data safe.
Collection agency cost is a factor but not the most important one.
The location of a collection agency does not matter either; stop searching for a Collection Agency near you. Select an agency with good debt collectors, high recovery rates, and has licenses to recover in your area.
Important considerations when shortlisting a Collections Agency:
- They should be GLBA, FDCPA, TCPA, FCRA and HIPAA compliant.
- You can start collections from any above step, not necessarily “Step 1”.
- For the Fixed Fees service, ask if the agency offers any guarantee on the recovery rate.
- What is their policy on the “expiration” of accounts purchased by you for the Fixed Fees service?
- Do they send collection letters in “Colored” or “Black and White” print? It is better to pay extra for colored print as they intensely impact the debtor.
- Can they send collection letters in both Spanish and English?
- Are the Scrubs performed, and if it includes Litigious debtor, Bankruptcy, or USPS Change of Address?
- If their entire operations are USA-based or partly outsourced to a foreign country?
- Do they have an online portal where you can Submit accounts, View reports, and Pause Collections on a debtor if needed?
- A bigger collection agency does not necessarily mean that it’s better.