A Collection Agency is your business partner. The criteria of shortlisting them cannot the same as shortlisting a plumber.
Collection agencies are well aware of Contingency Fees of their competitors. The ones charging a higher Contingency Fee than their competitors are not foolish. There is usually a solid reason why their fees are relatively higher than others.
An agency accepting to collect at a rock bottom Contingency Fees is probably not devoting enough resources or not employing the best debt collectors. Quite likely, the recovery rates of such agencies is lower.
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 percent of what they collect. If the agency’s own Contingency Fees is too low then the income of their debt collectors also goes down significantly. Good debt collectors are in high demand, and they will definitely not settle for a smaller paycheck.
- To maintain proper supervision and to provide a professional workspace for the Debt Collectors and Support staff, proper equipment & USA based infrastructure is highly desirable. For Example: Do you want debt collectors who work-from-home or those located in a foreign country to handle your accounts?
- To regularly train Debt Collectors on latest changes in Federal and State laws and ensuring they do not violate laws is extremely important and that of course has its own 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 name sake).
- 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 a costly mistake. You often get what you pay for.
I will share my personal opinion about what I believe are the optimum collection rates.
For Consumer Collections ( B2C Collections)
- Over 50% Contingency Fees is unacceptable, too high. Regardless of the returns. Unless the debt is more than 2 years old as 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.
Lets go 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
- 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 Contingency Fees:
Lets do some simple mathematics. Say you have to submit a debt of $10,000 to a Collection Agency. You have two options – “Agency-A” and “Agency-B”
This agency charging a 40% contingency fees and eventually recovers 50% amount (Recovers $5000). Means you are issued a check of $3,000 after 40% fees.
This agency charging a rock bottom 25% contingency fees and recovers 30% amount (Recovers $3000). 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 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 at all 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 account and complexity of the case. There is no fixed fees.