In an era of increased lending and borrowing activities and business conducted on credit and good faith, recovery of debts is a major concern for most businesses. When companies fail to recover funds due to them, they seek the help of collection agencies. Tracking down defaulters and implementing a debt recovery solution can be a drain on time and finances, particularly for small businesses. A collection agency is an organization that obtains or arranges for payment of money owed to a person or company. They help establish a level of communication between the creditor and the debtor.
Businesses that are either too small to have a collection department of their own or lack the expertise to collect on past due accounts themselves, engage the services of collection agencies. It also helps to protect a company's image to have a third party deal with these sensitive issues.
Collection agencies have the time and resources necessary to collect debts. They charge a commission of 8 to 10% on commercial debts. Typically, a collection agency will first send a letter asking a debtor to pay their bills. As a last resort, most collection companies take to legal recourse, where a court may arbitrate in the settlement of a disputed debt.
Most collection agencies work with debtors and provide help with payment plans or other settlement options and are thereby able to recover a larger percentage of money for their clients.
Some collection companies also offer services such as billing services, accounting and other administrative functions, to compliment their debt collection services. This decreases the burden on a company's accounting department.
Care must be taken in hiring collection agencies that are experienced in handling problems specific to a particular industry. Their effectiveness can be judged by the method they use for collection and their list of clients.