The Georgia Scroll
July 1998
Selecting a Professional Collection Service
You’ve always done your own in-house collections, but now you’ve decided to hire a third-party collection agency. Or maybe you’ve just started your own business and are in need of hiring a collection agency to assist you in collecting on past due accounts and other related tasks. Where do you start? First of all you want an agency that will represent your organization in a responsible and professional manner, one that provides a high rate of recovery while maintaining your public image. This decision involves more than just giving your business to the lowest bidder – it requires careful consideration.
More and more credit managers are recognizing the benefits of utilizing third-party collection agencies to collect past due accounts. Collection agencies are better prepared to collect delinquent accounts and can help increase the financial success of your business. Collection agencies use experience and resources to provide professional accounts receivable management services for numerous industries, saving credit grantors time and money. Agency collectors have expertise in collection techniques, and receive training and incentives that are not available to employees of in-house collection departments.
Gary D. Rippentrop, CAE, chief executive officer of the American Collectors Association Inc. (ACA), says there are several key issues that can help businesses determine the quality of an agency. "Thinking about these issues when selecting a service can greatly increase your success in the future."
Capabilities
Understanding the capabilities of an agency is an important step in selecting an agency. What can the agency do for you? How are consumers located when they can no longer be reached at the addresses or phone numbers listed on the accounts? What procedures are used to collect from a consumer when they have relocated? Is the agency licensed and/or bonded to collect in other states (when necessary), and do they have the ability to forward accounts to agencies near where the consumer has relocated? If they are forwarding to other agencies, what assurances are they willing to give about the agency they are forwarding to? Finally, how does the agency report the account status to clients, and at what intervals does the agency remit collected funds to the client? These are all important questions to consider when judging an agency’s capabilities.
Not only can collection agencies collect on past due accounts, but many also provide a variety of other services. Some provide billing services including coding, processing, printing and mailing. Others offer business administration and accounting services. Sometimes an agency provides "early out" services, when they start working an account before it becomes past due. Other additional services agencies consulting, telemarketing and campaign calling, reminder and follow-up appointment calls, and temporary office administration.
Technology is heavily utilized in the collection industry. Most agencies use sophisticated computer hardware and software, predictive dialing equipment, electronic skip tracing packages, as well as the World Wide Web and Electronic Data Interchange (EDI). When selecting an agency, consider the types of technology they are using and determine how your technology might interface to allow for the electronic transfer of data and information.
Recovery
Discuss recovery percentages and rates. The percentage rate of commission is less important than the agency’s percentage of return on the total dollars you refer for collection. For example, if you turn over $1,000 worth of accounts at a 25% commission rate and the collector recovers only $300, you will receive $225 out of these "bad debts." If you refer $1,000 at a 35% commission rate, but the collector recovers $500, you will receive $325. Even though the commission rate is higher, your profit would be greater in the later example because the agency’s recovery rate is higher. Remember that the commission rate by itself is meaningless; net return is the key.
Market Knowledge
Make sure the agency you work with has the skills and knowledge needed to successfully collect on your particular type of accounts. For example, collectors working in medical collections must be familiar with medical terminology and insurance requirements, while collectors working in student loan collections need to demonstrate knowledge of the regulatory framework devised by the Secretary of Education, the lender/guarantor relationship and bankruptcy rules related to collection of student loans. Agencies and credit managers need to be aware that each collection market needs to be handled differently.
Procedures & Policies
Investigate the procedures an agency uses to collect, including when it begins working an account, the collection letters it uses, and whether it has trained telephone collectors and skip tracers. Become familiar with the agency’s policies and standards. A visit to the collection office can be helpful and allows you to observe the operation of the business.
Compliance with the Fair Debt Collection Practices Act (FDCPA) is critical to third-party debt collection agencies. Inquire about the policies and practices the agency has in place to facilitate compliance.
Professional Credentials
Determine if the agency holds membership in state or national trade associations such as ACA. Members of ACA agree to comply with all federal and state laws and regulations, as well as the ethical standards and guidelines established by the association.
Make sure the agency complies with all state licensing and bonding laws, if applicable. If licensing or bonding is not required in your state, find out how long the agency has been in business. Experience is often a good indication of quality.
Training and Certification
Ask if the agency’s employees receive training and education. ACA members have access to educational materials and seminars covering all aspects of collections. Collectors can earn ACA certification by successfully completing courses and passing a test on professional telephone collection techniques and the FDCPA, the federal law governing the collection industry. Although this certification is voluntary, it indicates that the agency is responsible and recognizes the importance of professional, competent employees.
References
Another step in selecting a reputable agency is to ask for references. Try to contact at least two clients in your industry currently using the agency’s services. Find out if the arrangement is successful and how satisfied clients have been with the services they’ve received. Also, try to determine if the agency has a good reputation in the community by contacting other credit grantors, the Better Business Bureau or the Chamber of Commerce.
Insurance
The purchasing of Errors and Omissions Liability Insurance can also be an indicator of a conscientious agency. This insurance often extends coverage to the credit grantor as well as the agency. This is important because creditors can sometimes face litigation as a result of alleged violations by their collection agency. Look for coverage on claims brought by consumers for wrongful acts such as libel, slander, wrongful eviction, wrongful entry, false arrest, harassment, invasion of privacy, or interference with business. E&O Insurance often also covers violations of the FDCPA or Fair Credit Reporting Act (FCRA).
The above suggestions are important to consider when selecting an agency. The current competition among collection services is good for you as the client and contributes to a more professional and efficient industry. By carefully evaluating your company’s needs, as well as the capabilities as well as the collection services available, you can maximize your accounts receivable income and ensure that your customers are handled properly. Careful selection of a third-party collection agency strengthens your bottom line and helps you retain customers, leading to a more profitable business and financial well being.
ACA is an international trade organization of third-party debt collection businesses, with approximately 3,600 member agencies providing professional accounts receivable management services to over one million credit grantors. Headquartered in Minneapolis, ACA serves members in the United States, Canada and 55 other countries worldwide.
Copyright 1998 by the American Collectors Association, Inc. All rights reserved. Material may not be reproduced without written permission. Reprinted with permission from American Collectors Association, Inc.
Last modified: June 22, 2001