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Contingency Rates and Rate of Return - How To Choose a Collection Agency

In a recent article from the Commercial Collection Association of America (CCAA) we can learn more about the difficult decision our clients face in choosing a collection agency. What follows are excerpts from that particular article.

Selecting a collection agency based upon the lowest fee charged may not be the best choice. While price is always a factor in making any business decision, it should not be the sole determining factor, particularly where qualitative factors also need to be assessed. Most of us are familiar with the old adage; "You get what you pay for." Low collection rates often result in an agency scaling back its collection efforts. A collection agency is a business and as such needs to earn a profit. Lower prices or fees often means that the agency will cut back on its collection efforts to reduce expenses and earn a profit.

Instead of a low collection fee rate a creditor should focus on a measure called "net back." Simply stated, net back means the amount of money returned to a company from accounts placed for collection after the agency has been paid its fee. Money that the company can use in its business. This is true cash flow!

Often, agencies that charge low collection fees do not produce high net back. The following provides a simple example of net back. For this example, it is assumed that a company places an equal dollar amount of accounts with two collection agencies. Agency A charges 15 percent; Agency B twenty-five percent.

Amount Placed $200,000 $200,000
Amount Collected $20,000 $60,000
Collection Fees $3,000 $15,000
Remitted to Company (Net Back) $17,000 $45,000

In this example of net back, Agency B returned $28,000 more to the company than Agency A although it had a substantially higher collection fee, 25 vs. 15 percent.

Obviously in this example a creditor would be way ahead of the game if they had chosen Agency B over A. It is important in selecting an agency that you look beyond the fees that they are charging and understand the resources that will be applied to collect your accounts.

To gain that understanding ask the agency the following questions:

What has been their experience in collecting accounts similar to yours?

Who have they dealt with in your industry and can you contact them for a reference.

What collection procedures will they apply to the collection of your accounts? Will they rely on letters or will they also be using telephone collections, and where necessary place your accounts with attorneys for legal action. Does the quoted fee include all of these services or are there different fees for telephone collections and legal forwarding.

Finally, look for the industry reviews of the collection agency to be sure of receiving the highest level of professional collection services, competitive results and ethical dealings with you and your customers.

You can learn more about why IRG is America's top rated international commercial collection agency by clicking here.