Sunday, September 24, 2023

What is a debt collection agency? Small business guide

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Martin Haglin
Martin Haglin
Martin Haglin was born and raised in Conneticut. Martin has worked as a journalist for nearly a decade having contributed to several large publications including the BBC World and CNET. As a journalist for Business News Ledger, Martin covers state news, Finance and human interest stories.

A debt collection agency is a third-party debt collection services provider. For most small businesses, turning to an outside third-party collection agency is done as a last resort against bad debts.

Why is this important? Well, in 2010 alone, debt collection agencies in the United States were able to collect over $40 billion in debt. And, the Federal Reserve Bank of New York reports that approximately 30 million Americans have at least one debt in collection.

More about collection agencies and how they can work along with small businesses below:

What is a Debt Collection Agency?

As said by Gary Davis, Manager of Fidelity Creditor Service, “Credit is the basis of our economy. Businesses and consumers rely on credit to function… And, regardless of the current economic conditions – the role of a collection agency is to safeguard the rights of the creditors.”

In other words, debt collection agencies are third-party service providers that are hired by creditors to collect past-due debts from debtors.

Examples of small businesses or individuals that might need the services of a debt collector include:

  • Doctors
  • Landlords
  • Attorneys
  • Ambulance Companies
  • Plumbers
  • Online Merchants

And more! Collection agencies also collect different types of debt: medical debt, student loan debt, utility debt, car loan debt, personal loan debt, and so on!

How Does Debt Collection Work?

A debt collector’s job, upon hiring, is to compile information on debtors and use that information to work on the behalf of the creditor to collect debts — usually by contacting debtors through emails or calls, but also occasionally through litigation.

As for cost, most debt collection agencies work on a contingency agreement meaning that they are paid a portion of the amount they recover for their clients.

These types of agencies are called full-service debt collectors. An example of this is Fidelity Creditor Service. which offers a veritable one-stop-shop for all things debt collection. This includes an in-house attorney for obtaining court orders, in-house private investigators for tracking down debtors, and trained agents that are strategically persuasive yet always professional when communicating with debtors.

To offer an alternative, there are also some debt collection agencies that offer their services at a flat-rate fee. In this case, the creditor gets to keep 100% of the debt collected, but they must pay the agency at an agreed-upon rate (whether they are successful at collecting the debt or not) for their services rendered.

The Pros & Cons of Hiring A Debt Collection Agency

With a successful debt collection agency on your side, you won’t have to worry about settling with bad debt. Debt collectors, like Fidelity Creditor Service, will do all the work, including:

  • Collecting information on and establishing a rapport with debtors
  • Persuading debtors that it is in their best interest to pay their debt
  • Developing a payment plan with debtors so that they can pay their account
  • Establishing lines of open communication with debtors (through SMS, emails, calls, etc.) to help them honor their responsibility
  • And even, occasionally, filing necessary lawsuits to settle accounts before the court.

The only potential risk of hiring a collection agency is the act of debt collection itself. That is, a lot of small businesses fear that, by hiring a third-party agency to collect their debts for them, they might destroy their relationship with their clients.

This can be harmful to small businesses that rely on loyal customers or on word-of-mouth to spread their services. But, really, so long as you are working with a reliable agency that knows how to successfully communicate with debtors, this shouldn’t be a problem.

The Bottom Line: What is a Debt Collection Agency?

Debt collection agencies like Fidelity Creditor Service are there to help big enterprises and small businesses alike by gently coaxing their clients to honor their debt. Generally, they protect creditors from bad debt and reassure them during times of financial distress.

Of course, just like with any other service, there are certain risks involved when hiring a debt collector. However, so long as you’re careful in choosing an agency (perhaps one with a long service history), you should be able to reap the benefits of their services at very little risk to you or your business.


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