Collection Agency
A third-party service that pursues payment of debts owed to other businesses.
Definition
A collection agency is a business that specializes in pursuing payment of overdue accounts on behalf of creditors. They're typically engaged after internal collection efforts have failed—often when accounts are 90+ days past due. Collection agencies use various methods: phone calls, letters, skip tracing, and potentially legal action.
Collection agencies typically work on contingency (keeping 25-50% of collected amounts) or flat fee models. The choice depends on debt size and age. Older, smaller debts often go to contingency collectors; larger debts might justify flat-fee or legal collection.
Why It Matters
Collection agencies can recover money you'd otherwise write off. When your internal efforts have failed, professional collectors often succeed through persistence, expertise, and the psychological impact of third-party involvement. Even recovering 50% of a bad debt is better than zero.
However, collection agency involvement affects customer relationships—usually negatively. Use agencies for accounts you've decided aren't worth preserving. For valued customers having temporary difficulties, direct negotiation is usually preferable.
Examples
- 1
A business sends accounts over 120 days to a collection agency, recovering an average of 35% on referred accounts.
- 2
A company uses a "soft collection" service that sends professional demand letters before escalating to traditional collection.
- 3
An analysis shows collection agency referrals at 90 days recover 40%, but waiting until 180 days drops recovery to 15%.
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