COLLECTION
FEES ARE ONLY ONE FACTOR IN SELECTING A COLLECTION AGENCY
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 prices or fees often means 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." Simply stated, 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 15 percent; Agency B twenty-five
percent.
| AGENCY A | AGENCY B | |
| Amount Placed | $200,000 | $200,000 |
| Amount Collected | $20,000 | $60,000 |
| Collection Fees | $3,000 | $15,000 |
| Remitted to Company (Net Back) | $17,000 | $45,000 |
In this example of net back, Agency B returned $28,000 more to the company
than Agency A although it had a substantially higher collection fee, 25
vs. 15 percent.
Obviously in this example a creditor would be way ahead of the game if
they had chosen Agency B over A. It is important in selecting an agency
that you look beyond the fees that they are charging and understand the
resources that will be applied to collect your accounts.
To gain that understanding ask the agency the following questions:
What has been their experience in collecting accounts similar to yours?
Who have they dealt with in your industry and can you contact them for a reference.
What collection procedures will they apply to the collection of your accounts? Will they rely on letters or will they also be using telephone collections, and where necessary place your accounts with attorneys for legal action. Does the quoted fee include all of these services or are there different fees for telephone collections and legal forwarding.
Finally, look for the Seal of a CERTIFIED agency to be sure of receiving the highest level of professional collection services, competitive results and ethical dealings with you and your customers.
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