A Collection Agency is your business partner. The criteria for shortlisting them cannot be the same as shortlisting a plumber.
Collection agencies are well aware of the Contingency Fees of their competitors. Agencies that charge a higher Contingency Fee than their competitors are not foolish. There is a solid reason why their fees are higher than others. Agencies that charge higher usually go to great lengths to recover your money.
It is more important how much more a collection agency recover and not how much they charge. Good debt collectors are in high demand and will not settle for a smaller paycheck.
An agency accepting to collect at rock bottom Contingency Fees is probably not devoting enough resources or not engaging the best debt collectors. Quite likely, the recovery rates of such agencies are lower. Agencies using inferior-quality of debt collectors are a risk to the reputation of their clients.
Collection Agencies have high overhead costs:
- Employing experienced and top-of-the-line debt collectors is expensive. Individuals who make these collection calls (Debt collectors) are commission-based contractors. They get a small percentage of what they collect. If the agency’s Contingency Fee is too low, then the income of their debt collectors also goes down significantly.
- To maintain proper supervision and to provide a professional workspace for the debt collectors and support staff, adequate equipment and USA-based infrastructure are highly desirable. For Example: Do you want low-wage debt collectors who work from home or those located in a foreign country to handle your accounts?
- To regularly train Debt Collectors on the latest changes in Federal and State laws and ensure they do not violate debt collection laws is extremely important and that, of course, has its financial overheads.
- Handling data securely and performing annual security audits are not cheap. You will be sharing a lot of personal data of your customers with them. Can you imagine the liability if your company is sued in case your customer’s data was stolen from the premises of a 3rd party collection agency?
- Subscription to various services and tools required for effective debt collections is not cheap (For example: Advanced skip tracing service, not just a Basic skip tracing for the namesake).
- To be licensed, bonded, and insured against possible counter-lawsuits is important and costs money.
- Providing a customer-facing portal to submit and monitor accounts, run performance reports and upload documents securely results in IT costs too.
Hiring a collection agency just because it offers rock-bottom collection fees without investigating further can be costly. You often get what you pay for.
Optimum collection fees.
This is what we believe are the optimum contingency collection fees.
For Consumer Collections ( B2C Collections)
- Over 50% Contingency Fee is unacceptable and too high. Regardless of the returns. Unless the debt is more than 2 years old, it is very hard to collect.
- 50% is slightly on the higher side.
- Between 45% and 50% is considered acceptable.
- Between 35% to 45% is typically considered an optimum contingency rate for a good collection agency.
- Below 35% may be too low unless the balance is over $5,000. Find out more.
Let us dig a little further.
- A 40% contingency rate is optimal if your average balance is between $100 to $1000
- A 35% contingency rate is optimal for balances between $1000 to $5000
- Less than 35% contingency rate is fine for balances between $5000 to $20000
- The contingency rate will generally be higher for accounts over 1 year old (by about 5-10%). This is because older accounts are hard to collect.
How Performance wins over Fees
Let us do some simple mathematics. Say you have to assign a debt of $10,000 to a Collection Agency. You have two options – “Agency-A” and “Agency-B”
Agency-A
This agency charges a 40% contingency fee and eventually recovers 50% amount (Recovers $5000). This means you are issued a check of $3,000 after 40% fees.
Agency-B
This agency charges a rock bottom 25% contingency fee and recovers 30% amount (Recovers $3000). This means you are issued a check of $2,250 after 25% fees.
Performance wins: Anybody would select Agency-A
Let me repeat
Collection agencies are well aware of the Contingency Fees of their competitors. They are not foolish to keep higher contingency fees than their competitors without a solid reason.
Find it out before you shortlist. I am not saying that all agencies with low contingency fees are bad or under-equipped or vice-versa, but do find out more. Make a mindful selection.
For Commercial Collections: (B2B)
Due to higher balances, contingency fees are between 15% to 35%. A collection agency will give you a quotation depending on the balance, age of the account and complexity of the case. There is no fixed fees.