When should I use a collection agency? 

In most cases, if an account is 90 days delinquent (120 days after the invoice date), you should initiate placement with a collection agency, especially if no response has been received from the customer.
By that point, you have probably sent out several statements, collection letters and made several collection phone calls. You have attempted to bring to the customer's attention the delinquency and your concern about it. The customer's lack of response to your collection calls and letters indicates either a lack of concern, a cash flow problem or is a demonstration of intent to not pay. In any case, a collection problem exists, and your best chance for collecting your money is to place the account with a collection agency.
There are times when you should place an account earlier with a collection agency.
  • Your customer has broken two or more promises of payment .
  • Your customer's telephone is disconnected. Double check with the information operator, and if no new listing can be obtained, place the account immediately.
  • Your customer repeatedly requests documentation even though he/she has been supplied the documentation previously.
  • Your customer indicates an inability to pay and refuses to provide a specific date for payment or to initiate a realistic payment schedule.
  • Your customer states he/she will "take care of the account," but refuses to make a realistic commitment for payment or to work out a payment schedule.
  • Your customer suddenly indicates, in response to your requests for payment, a dispute regarding the merchandise shipped or your terms of sale. Such a dispute was not raised previously.
  • The costs of your own staff’s efforts do not justify further time investment. Placing accounts with a collection agency will help ensure your staff is focused on mission critical activities.

How do your rates compare to XYZ Company?

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 fees often mean 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." 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 25 percent; Agency B 40 percent.

Amount Placed
Amount Collected
Collection Fees
Remitted to Company (Net Back)

In this example of net back, Agency B returned $21,000 more to the company than Agency A although it had a substantially higher collection fee, 40 vs. 25 percent.

Selection of a collection agency should be based on several factors. Some factors to consider are: collection services provided, resources available, approach to account recovery, security, reporting, and client services to name a few. The decision to hire Agency A based on a lower commission rate shows a decrease in recovered revenue. A decrease in revenue equals: increased revenue cycle, decreased cash flow, and decreased ability to achieve growth for your organization.