What are the Limits to Credit Collection Services?

If you're not able to collect a debt from a customer, it may be a good idea to seek out credit collection services to assist in collecting the bad debt. However, before you turn a bad debt over to a credit collection service or collection agency, there are certain things that you should be aware of.

Limitations of a Credit Collection Agency

When you place a bad debt for collection with a credit collection service or agency, you should be aware that the credit collection agency may or may not be able to collect the bad debt. Furthermore, you should be aware that most of the time credit collection agencies offer only a slightly improved chance of recovering the debt than if you had attempted to collect the debt yourself.

While collection agencies do have the ability to place a consumer's bad debt on the consumer’s personal credit report, the other methods of debt collection that are available to them will generally be available to your small business also. You may want to also consider that a collection agency may be charging a very high premium for providing a service that someone in your small business may be able to perform equally as well.

Collection Agencies and Your Business’s Exposure

Most of the time, individual debt collectors are paid a commission on bad debts that they collect; therefore, many debt collectors may be motivated to collect a bad debt at any cost. When some debt collectors feel pressured by the need to collect more bad debts to earn a living or meet a collection quota, they may result to threatening debtors in an unethical or illegal manner. Furthermore, you might want to think about how unethical or illegal collection practices may reflect badly on your small business or company and how unethical collection attempts may potentially damage the reputation of your business.

No Guarantee of Success

Even if you do place your backpack for collection with a collection agency or collection service, there is absolutely no guarantee that the collection agency will be able to recover monies for the debt. Frankly, if you have made a diligent effort to recover a bad debt from a customer yourself, chances are that the collection agency may not be any more successful than you were. Many collection agencies claim very high success rates; however, collection agencies best serve companies that do very little in the collection of bad debts themselves.

Limited Debt Recovery Amounts

When you place a bad debt for collection with a collection agency, you will never receive the full amount of the bad debt. Furthermore, many collection agencies may charge as much as 50% of the original debt amount in order to attempt collection of the debt for you. Therefore, you should always consider if the amounts that will be collected is worth the time and effort of utilizing a credit collection agency. You should be aware that many collection agencies will charge an upfront account setup fee or other processing fee before they will attempt to collect any bad debts. Therefore, you will generally make an initial investment with some collection agencies with no guaranteed return at all.