"Bad debt" and overdue payments are problems that businesses have faced from times immemorial. Tracking and following up with debtors is a major problem and is a drain on time and finances, especially for small businesses. Debt collection agencies help solve this problem by interacting with the debtors and finding mutually acceptable solutions to payment problems.
Debt collection agencies contact debtors in person, by mail or by phone. They earn a commission on money that they are able to recover. Some collection agents vary their fee depending on the age of the debt. The fee may be higher if an account reaches a stage where legal action is needed.
Collection agencies fall under the purview of the Fair Debt Collection Practices Act and are required to obtain a license to practice. Collection companies must comply with federal laws, which requires that debt collectors treat debtors fairly and prohibits certain methods of debt collection, including threats and harassment. The Federal Fair Debt Collection Law regulates debt collectors and also covers attorneys who collect debts on a regular basis. Many states require collection agencies to be bonded.
A debt collection agency is allowed to contact a debtor in person, by mail, telephone, telegram or fax. They are restricted from contacting a debtor at inconvenient times or places. A debt collection agency will typically attempt to collect debts using three techniques. They begin by issuing a formal letter of demand, followed by a telephone call. A second letter of demand or an attorney letter may follow.
Debt collection agencies are experts in credit management. Their effectiveness can be judged by the method they use for collection. Choosing the right debt collection agency is always a tough decision. It is best to evaluate the extent of monies owed and the number of unique clients and choose the right sized collection agency accordingly.
For most companies, money stuck in the hands of debtors for extended periods is a direct loss in itself; spending time trying to recover it is investing further in the loss. Hiring a collection agency gives businesses the ability to focus on other key aspects of their business and allow a specialist to efficiently handle the recovery of funds.