Choosing a Collection Agency: Weighing Price vs. Value
Your past-due accounts are taking up too much of your precious time, and you’re at your wit’s end. As a business owner, you’ve been thinking about turning them over to a collection agency. But you keep asking yourself one big question: Is the cost worth it?
Before that question can be answered, you must first understand why you may need to hire a collection service in the first place.
Why You Need a Collection Agency
The longer a debt goes unpaid, the less likely you are to recover it. Debt collectors are experts in collecting unpaid debts and it’s their full-time job. They’re skilled at streamlining the whole process; they have access to data software, databases, and tracking systems. What’s more, they’re familiar with the ever-changing federal rules and regulations that govern debt collection.
In other words, they can recover money you’d never be able to recover on your own.
Once you’ve decided that a collection agency is the way to go, then the selection process begins. This is when you’ll want to ask some more questions to prospective collection companies. Such as: What is your recovery rate? And how will you ensure the safety of my customer’s data?
And, of course, another important question that companies always want answered right away is…
…How much will this cost me?
There are many factors that determine collection agency fees, including the size of the debt portfolio, the type of work required to collect the debt, the age of the account, and the agency’s experience.
Most collection agencies have some type of tiered pricing structure, and most (including BARR Credit Services) work on a contingency basis. That is, they receive a percentage of the debt collected. (At BARR Credit Services, if we don’t collect for you, we don’t get paid.)
Who Recovers More Money for You?
When choosing a collection service, you may be tempted to go with whoever offers the cheapest rates. That would be a mistake. Keep in mind that the lowest fee doesn’t mean the best results. Rather, it’s the recovery rate that’s really important.
The following example explains why:
Let’s say you have $100,000 worth of unpaid accounts receivable that you turn over to the average collection agency.
The average agency will recover 20% of the money owed to you, or $20,000. They will typically charge a 15% contingency fee based on the amount of debt collected, which would be $3,000 for the $20,000 recovered.
So after fees are paid, you’ll end up with $17,000 recovered from $100,000 worth of debt.
On the other hand, let’s say you turn over $100,000 of unpaid debt to BARR Credit Services. BARR has an average recovery rate of 40%, so they would recover $40,000 of the debt.
Let’s say BARR’s fees are typically around 25%, so that would be $10,000 for the $40,000 recovered. This would leave you with $30,000 recovered on $100,000 worth of debt.
The Bottom Line
As you can see, choosing a collection service with a higher fee rate is clearly the more cost-effective solution when that service has a recovery rate that’s essentially double the industry average.
Choose the BARR Credit Services collection professionals – for a maximum return.