Hiring a Collection Agency For Unpaid Invoices
Hiring a collection agency for unpaid invoices may be foreign territory for business owners. Here’s everything you need to know to get those invoice paid for via a debt collection agency.
It’s estimated that US small businesses are owed $825 billion in unpaid invoices. On average, this would give a business an extra $84,000 to fund their operations.
Getting paid is clearly one of the challenges small businesses face. With the value of unpaid invoices so high, it’s little wonder cash flow is a key contributor to business failure. As a business owner yourself, you know how important it is to get paid on time.
There will always be those clients who don’t pay up, even after months of chasing them. One of the options you have is to hire a collection agency. They can help you get the funds for the work you did or the products you delivered.
Hiring a collection agency for the first time can be daunting. We’ll walk you through it in this guide.
When to Hire a Collection Agency
Hiring a collection agency should be one of your last resorts. If a client falls a bit behind on their payments, you should try to work it out with them first.
Send reminders to a client when they miss a payment due date. Sometimes, this is enough to get the client to pay. If the client doesn’t respond or still doesn’t pay, you can try calling them.
You can also send a demand letter. A demand letter is certified by your attorney and demands immediate payment. Demand letters sometimes get the client to pay in short order, but they don’t work in every situation.
So, when do you hire the collection agency? Before you start making calls, you’ll want to make sure the situation meets certain criteria. Ask the following questions:
- How long has the debt been unpaid? If it’s been a week, you might not want to call in the collection agency. If it’s been 30 or 60 days, it may be time.
- How much is the debt worth? Remember the agency needs to be paid, so you may want to reserve this option for larger accounts.
- Have you been able to contact the client?
The longer the debt has been unpaid and the larger the amount, the more sense it makes to call in the collections experts.
Collection Agency Fees
As we mentioned, the debt collector will need to be paid. Agency fees reduce how much of the debt you receive when you do get paid.
Collection agency fees typically work one of two ways. In the first scenario, the agency buys the debt from you. They often pay a low price.
This could mean you receive a fraction of the value of the unpaid account. If the account is worth $25,000, you may receive $10,000 or less. The trade-off is that you receive this payment immediately and no longer need to chase after the client.
Some collection agencies take a percentage of the invoice. If your account is worth $1,000 and the agency charges 30 percent, you’ll pay them $300. This fee is the same no matter how much of the debt the agency actually collects.
Do be on the lookout for flat fees and extra charges. These fees may be hidden or structured as “account fees.” Always ask why you’re paying a fee and try to tie what you pay to the agency’s performance.
The Advantages of Hiring a Debt Collector
Why would you hire a debt collector? There are a few obvious reasons. The first is that you can stop dealing with a non-paying client and turn them over to an agency.
This frees up your time and resources. Your staff can stop chasing after that unpaid invoice and get back to work for clients who actually pay you.
If the agency you hire buys the debt, you can also free up funds. While you won’t receive the full amount of the invoice, you will get paid in short order. If cash is tight in your business, this could be a lifeline for the business.
If you’re planning to write the debt off anyway, this may be the right option.
If you haven’t been able to contact the client, working with a collection agency could help. An agency uses different techniques to find clients who have “disappeared.” They may be able to find people you can’t on your own.
This increases your chances of collecting on an unpaid invoice. The older the debt is, the less likely you are to collect, so this can improve your chances.
There are other, tangential benefits of hiring a collection agency. One is that you show clients you mean business. This sends a message both to the non-paying client and to other clients.
The Cons of Hiring a Debt Collector
As with anything, there are some downsides of hiring a debt collector. The most obvious one is that you may lose a significant part of the unpaid invoice value.
If it’s unlikely you’ll collect on the debt or you’re putting significant resources to it, this might be a good plan regardless of lost money. Recovering even part of the money you’re owed is better than getting nothing.
Another drawback is client perception of debt collectors. Your clients may not appreciate your decision to work with an agency.
If the client hasn’t paid you long enough that you need to hire a collection agency, you may not worry about keeping their business.
Find the Right Agency
After reading this guide, you may think hiring a collection agency is the best move for your business. It’s time to collect on those unpaid invoices and get what’s owed to you.
The next step is to choose an agency. If you’re feeling overwhelmed by the number of choices, take a look at some of our blog articles. We can help you compare costs and find the right collection service at the right price.