What Happens When You Hire a Collection Agency for Your Small Business?

By Dean Kaplan

You have an overdue invoice and a client who won’t pay. The client is either not taking your calls anymore or you’re getting a lot of excuses. It may be time to call in a collection agency.

Before sending a customer to collections, you should know what a collection agency is going to do with your claim. Here is the process successful collection agencies take to collect the money owed to you.

Collection agency will have you evaluate the claim

The first thing a collection agency will do is have you evaluate the claim to make sure the business that owes you money is, in fact, a valid business. Too often, small business owners enter into agreements without doing even a basic credit check on their new partners. Doing basic research, such as asking for references and double-checking website addresses and phone numbers, can help keep you from doing business with a fraudulent company.

Review your contracts and agreements, including any relevant email or written conversations. Sadly, there are situations where collection agencies cannot accept a claim. If you have been the victim of business fraud, or if your contract is worded poorly or incorrectly, a collection agency may not be able to help you.

There are many business reasons for keeping good records of your invoices and contracts, and the possibility of one day having to send an account to collections is one of them. The better your records and paper trail, the easier it will be for a collection agency to collect for you.

Collection agencies like to move quickly. The longer a debt goes unpaid, the less chance there is of collecting on it. You don’t want to slow down the process by spending weeks or months trying to track down your own invoices, statements, signed contracts, and communication records.

They will contact the debtor

Collection agencies will usually start with a letter that they will send to the debtor by mail, email, and fax. Included with the email will be all the relevant documentation proving the debt, such as copies of the unpaid invoice and underlying contract. This validates the debt and the agency's authority to act on your behalf.

All correspondence is then immediately followed up with a phone call to let the debtor know the situation is serious, needs attention, and that they should look for the email. On rare occasions, sending a letter is all it takes. If the debtor has not been paying because they are disorganized or because they were prioritizing other bills over yours, a letter from a collection agency can be a powerful motivator.

There are articles that recommend you send a letter threatening to sue or have a lawyer friend send a letter to your client on your behalf. While we can understand the appeal of doing this, it's not a great idea. Occasionally such a letter works, but usually it doesn’t.

Once you’ve threatened to sue or used a lawyer to threaten someone, you have backed yourself into a corner if the debtor does not pay. When the next collection effort comes from a collection agency, the debtor will assume you have decided against suing and your leverage is compromised. Your business is too important for you to play a game of chicken with your clients.

Next, they will try to have a conversation

In popular culture, debt collectors hit hard, browbeating customers into paying their bills. This method, however, doesn’t work when it comes to commercial collections. Successful debt collectors will begin the collection process by talking. They will find out what the real situation is and figure out how to come to an agreement.

Some people are reluctant to send an account to collections because they don’t know how the collection agency will treat their client. The truth is, a trained collection agent is more likely to have a polite, productive conversation with a customer than you are. Why? Because the collection agent isn’t emotional about the situation.

Since the collection agency will talk to clients on your behalf, it is essential that you carefully research any agency before you hire them. As an industry, collection agencies face a high number of complaints. Make sure any agency you hire is capable of representing you well. Check their professional affiliations and online reviews.

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When all else fails, they will go to court

In many cases, simply being consistent and persistent works. When the debtor finally realizes they can no longer ignore the invoice, they pay it.

Sometimes, however, the issue isn’t a matter of “wanting to pay” but being able to pay. In those cases, a collection agency will try to come to an agreement with the debtor that allows you to get as much of the money owed as quickly as possible.

But sometimes neither persistence nor negotiation work. When all other avenues have been exhausted, the debtor may be taken to court.

There are attorneys who will take collection cases on contingency, with you only having to pay the out-of-pocket costs. Out-of-pocket costs are typically between $350 and $1,000, so it isn’t very expensive to sue. Still, collection agencies will avoid going to court because the process can be slow. Many courts are backlogged, and if the debtor defends the lawsuit, it could take over a year before there is a trial. Also, once you get a judgment, it doesn’t mean you automatically get paid. A judgment merely starts the process of trying to collect on the judgment.

The possibility of going to court is a reason you want to make sure you have strong contracts before beginning work. When you can show this strength to a debtor, it often motivates them to pay. But, if your contracts and documentation will not hold up in court, you may have difficulty finding a reputable collection agency to take your claim.

One day you may need a collection agency

Sooner or later, almost every business will face the problem of an unpaid invoice. Knowing what to expect if you have to send your client to a collection agency can help you feel more confident and secure about moving forward.

RELATED: How to Collect Money From Slow-Paying Customers