When creditor businesses choose to outsource their debt collection to a professional collection agency, they have to make a wise decision because not totally all agencies would be the same. A first-party collection agency is typically a subsidiary of the first creditor, while third-party agencies operate by either buying debt at a reduced rate (sometimes as much as 90% discount) or by representing the creditor in the collection process. These third-party debt recovery agencies may charge a flat fee before services rendered or may work on a contingency basis, taking only a portion of the funds collected.
Why Businesses Should Outsource Their Debt Collection
Debt collectors are specially trained with certain skills, in addition to a thick skin. Also, debt collection agencies have usage of a national network of resources, including government officials and private investigators, who are able to assist them in investigating a debtor and his or her financial status so they are better able to assess repayment situations. Also, debtors have a tendency to drag the name of the recovery agency through the mud.
If your company were to collect debts having its own subsidiary agency, then a brand too would get impacted by the bad publicity. Then, there are a special group of debt collection skills required – no business can acquire these specialized skills simply by setting up a debt collection department. Therefore, it’s wise to outsource debt collection to a third-party commercial collection agency.
Why Businesses Must Never Prepay For Third Party Debt Collection
1. Sometimes, collection agencies provide what’s called pre-collection or soft collection services, this means sending a series of letters to the debtor that includes instructions on debt repayment by a specific date and consequences of failure to comply, such as negative credit reporting and collection action. How to hire a collection agency These agencies charge a fee to creditor businesses beforehand and send the letters at regular intervals.
The issue lies in that debtors simply throw these letters out, aware of these meaning. If the debtor has already been in default, odds are he or she doesn’t have a clean credit history anyway and will not be bothered by threats of adding further negative marks.
2. Debtors are knowledgeable about playing exactly the same game over and over and often simply produce a call to the soft recovery agency to get time, realizing that the letters will be sent but no action will be used to accompany those letters. This results in big delays in the collection process.
3. Mailing the letters is a minimal expense for soft collection agencies because they have their own mailing department. They spend little on this and less on calling and sweet-talking debtors, pocketing the advance they are paid by the company. Should they get no results, it doesn’t bother them because they have already collected their fee and deposited it within their bank account.
4. Everyone in the market knows that collection letters from commercial collection firms are ineffective, including the collection agencies. Actually, they are aware that at some point in the process, the creditor will end up impatient and look for the agency to roll the debtor to a contingency plan.
In realizing that the letters don’t rein in the debt, businesses should remember that prepaying fees to soft collection agencies sending serial letters is a waste of time and money. On the other hand, collection agencies who charge on a contingency basis work very well, charging only a portion of what’s actually collected. This leaves the creditor business with zero risks.
In this case, everyone wins as the contingency agency needs the income and fights to collect the biggest amount of money possible in a aggressive fashion, as the creditor business collects debt they’d practically written off, never expecting to note that cash again. It’s necessary to success to outsource the debt collection process to a professional collection agency, but it is vital to never prepay for a soft debt recovery agency to send letters.