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Whats New in the Collection Agency Business: Tips and Traps

Due to the efficiency of technology, especially databases, email, and VoIP, the cost of collecting debt has fallen significantly. As a result, even small debts of less than $200--utility bills, parking tickets, and cell phone bills, for example--are being actively collected.

Bill Collection Business Easy to Get Into
Most states do not require any special licensing for collection agencies or their employees other than normal business licenses. Most agencies do require that their employees have more than a high school diploma.With this amount of money up for grabs, and the low barrier to entry, it is no wonder that the number of collection agents, many of them one-person operations, has doubled in the last decade and is expected to increase.

Choose Collection Agency Carefully
So, what does this mean to businesses that are trying to collect outstanding payables? First, there are lots of agencies and individuals looking to help recover outstanding debt. Second, it pays to be selective when outsourcing bill collection.

The traditional method of collecting balances owed is to have internal employees call and send letters to customers, and more than 75% of debt is pursued in this way. However, the longer an outstanding amount is left unpaid, the more expensive it becomes to continue working it, and in fact, the less likely it is to be paid.

Collection Agency Recovery Methods
Thats where collection agencies come in. When invoices are turned over to a collection agency, it uses the same initial approach as the in-house collections folks do--makes calls and sends letters. The difference is, a collection agency is working for a percentage of whatever it collect, usually 20-35%. Collection agencies usually have better close ratios than in-house agents although they are bound by the Fair Debt Collection Practices Act (FDCP), while the direct creditor is not.

Collection Agency Debt Sales
If a business is in a hurry for its cash, it might instead sell the debt to a collection agency. In this case, the collection agency will negotiate to pay as little as possible for the debt knowing that it can keep 100% of what it collects. Again, the agency will make calls and send letters and must adhere to the FDCP. When a business sells debt outright to an agency, there is a danger that the collection agency may damage any existing relationship between the creditor and the debtor since there is not much incentive to nurture the relationship, and the collection agency might be motivated to use stronger tactics to collect its money.

Collection Agency Debt Auctions
One of the newer tactics in collections is to auction off debt. Both creditors and collection agencies can auction debt through online auction sites. In other words, debt can be sold, and sold, and sold. The upside to this for creditors is that they are likely to get more for their receivables than if they sold them outright, but they still retain the right to choose to whom they sell. This scenario gets sticky though if after selling to a bidder, the bidder then sells the debt again, possibly to a company with whom the creditor did not want to be associated.

So, to turn the phrase buyer beware on its ear: seller beware. Deal only with collection agencies with verifiable track records and references.

Sources

Bls.gov

Smartmoney.com

Wall Street Journal



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