The most important factor to take in when choosing a collection agency is how much it will end up costing you. Not all collection agencies use the same model for pricing or offer the same rates. Since you’re already behind on collecting these accounts, you want to make sure you are still walking away from the account making money and not spending more than you’ll ever get.
There are three different common pricing models you will find for collection agencies; upfront payment, contingency based on size and contingency based on age.
Some collection agencies will ask for a down payment, minimum payment or upfront fee before you start working with them. Then, once you have paid they minimum fee, they will begin working and will charge based on the total number of hours you worked or the total number of accounts they collected on for you. Most of the time, this pricing model does not make a lot of sense, as there are many companies that don’t charge an upfront fee. Be careful with collection agencies when you see this worked into your proposal.
CONTINGENT BASED ON SIZE
Collection agencies with a pricing model based on size won’t charge anything until they have actually collected money from one of your accounts. This is a nice model because you aren’t spending money unless you’re making money. Based on size refers to the size of the invoice. For example, if the collection agency collects on an invoice worth $1,000, they will keep 50 percent of the invoice. If the collection agency collects on an invoice worth $50,000, they will keep 15 percent of the invoice. The rest of the invoice is left for you to collect.
CONTINGENT BASED ON AGE
This pricing model is similar to contingent based on size, however the payment for the collection agency is based on the how old the invoices are. The older the invoice, the larger of a cut the collection agency gets to keep. For example, if the invoice is 1-2 years old, they might keep 50 percent of the invoice, whereas if the invoice is only 90 days past due they will only keep 20 percent of the invoice. The only downside to this model is how much the invoices are worth. If your invoices that are 1-2 years old are smaller amounts, the collection agency will take most of the money you were looking to collect on.
The disappointing part about using a collection agency, in general, is you have to give up some of your hard-earned money. You might have worked hard to earn $10,000, but in the end you’re only taking home $5,000. It’s important to note that, because of this, using a collection agency should be your last line of defense to collect. You should make every effort to collect on the invoice on your own, such as employing technology like automated accounts receivable software, so that you can still collect the full amount.