The True Cost of Hiring a Commercial Collection Agency

It’s always exciting to land a new client, but when that client does not pay you and the debt adds up, excitement turns into anxiety and disappointment. It may be time to consider hiring a commercial collection agency. We all know managing a business and the cash flow process is a financial pain point. We’ve spent a lot of time on this blog discussing:

Today, we will discuss the true cost of hiring a commercial collection agency.

What is a Commercial Collection Agency?

Commercial collection agencies are experienced professionals in business debt collection. We persuade debtors to pay their debts faster and more often.

Commercial collection agencies’ laws and sometimes practices are very different from personal collections. The FDCPA (Federal Debt Collections Practices Act) does not apply to commercial collections.  And during our process, we’re interested in maintaining client relations, whereas, by the time a customer receives a call about personal debt, that relationship is often already ruined.

What is a Commercial Business?

A commercial business is defined as a business or individual who provides a service or sells physical products. A commercial business can be organized as a corporation, limited liability company (LLC), partnerships and proprietorships.

The Kaplan Group also collects against individuals personally liable for business debt, which could happen if they signed a personal guaranty, the business is a proprietorship, or the corporation or LLC was not in good standing at the time the debt was incurred. 

What are the Benefits of Hiring a Commercial Collection Agency?

Hiring a collection agency means hiring experts to professionally handle the debtor while you focus on your business. We’re professional negotiators with years of experience. We understand the inner workings of the collection agency’s systems and know-how to maximize our client’s chance of getting paid. We also have in-house attorneys to handle legal actions or manage lawsuits if there is no resolution to a debt between parties.

How Much Does it Cost to Hire a Commercial Collection Agency?

That answer varies—when hiring a commercial collection agency. Most agencies bill under two arrangements. The first is on a contingency basis, which means they only get paid if they collect money from debtors. Usually, contingency rates are based on the size of the collection and/or the time or age of the collection period. The second approach is a flat fee.  Some agencies use both approaches, with an initial flat fee and a contingency fee if money is collected.

Benefits Of A Contingency Fee Structure

Using the contingency method creates an agreement where the creditor agrees to pay the collection agency a percentage of the debt if they receive It successfully from the debtor. But, if the agency doesn’t generate payments from the debtor, then no fee is earned or paid.  This way both the creditor who is owed money and the collection agency have aligned interests – they both make more money if the agency succeeds, and neither makes money if nothing is collected. 

This is particularly attractive to most creditors as they are very reluctant to spend money trying to collect a debt.  We hear it all the time, “I don’t want to throw good money after bad.” This occurs when we tell clients we have exhausted all our pre-litigation collection efforts and the only remaining option is contingency litigation which typically has a cost of $500 to $1,200. While we solve over 97% of our successful cases without litigation, we are also having to regularly ask clients if they want to sue. Often it is surprising when a company that is owed $20,000 to $100,000 is reluctant to invest $1,000 in litigation. The pure contingency model for pre-litigation collection efforts is something the Creditors generally prefer.

Contingency Rates and Fee Structures

At The Kaplan Group, our contingency fee ranges from 10% to 50% based on the size of the claim, with a smaller contingency rate the larger the amount that is actually collected:

Contingency Fee Based Size of Debt

  1. Claims $1,000 and undercharge a 50% rate
  2. Claims $1,000-$5,000 charge a 25% rate
  3. Claims $5,000-$50,000 charge a 20% rate
  4. Claims $50,000-$500,000, have a 15% rate
  5. Any claim over $500,000 charge a 10% rate

This tiered approach allows us to put in the effort required to collect and end up with compensation that motivates us to put in that effort. On smaller claims, we need a higher percentage to make it worthwhile. As the claims get larger, they often do require special expertise and unusual efforts to negotiate a resolution, so the total fee that gets earned should be higher.  But as a percentage of the amount collected, it can be lower so that our client’s get a higher percentage recovery. Since we specialize in larger claims, it is important to have lower percentages for claims over $50,000. 

The One-Size-Fits-All Approach

Many agencies have one rate for all sizes, or just a couple of tiers, as they rarely handle large claims. Some agencies specialize in smaller claim sizes, using automated letter campaigns, overseas based collectors, call centers and predictive dialers. These types of agencies are more efficient at these claims than our agency and can charge a lower contingency percentage to match this lower level of effort by the actual collector.

Contingency Fee Based on Age of Debt

Other agencies prefer to base their rates on the age of the debt.  It is well known in our industry that regardless of the size of the debt, the older the debt, the less likely it is to be collected.  By the time a debt is 6 months past due, there is only a 50% chance of collecting. By the time it is 2 years old, there is about a 10% chance of collecting. So it makes sense that an agency can charge less for a more recent debt than an older one. Here is an example of pricing based on age:

  • Claims under 90 days charge a 20% rate
  • Claims 90-180 days long charge a 25% rate
  • Claims 6-12 months charge a 33% rate
  • Claims that have latest 1-2 years charge a 40% rate

We rarely get large claims that are only 3 to 6 months old.  Our clients are still trying to resolve the problems themselves which makes sense. Many of the large claims we get are 1 to 2 years old.  Charging 40% to 50% when we collect $50,000 or $250,000 is just too high. So because of our specialty in large claims and international claims, it makes sense for us to base our rates on size rather than age.

Reasons to Consider the Flat Fee Method

In a flat fee agreement, the collection agencies charge a fixed rate per account no matter the debt’s size. With a flat fee, clients are charged in advance, leaving no choice but to pay regardless of whether the debt is collected. The prices can start as low as $15 per account. So, while this may sound appealing, the flat fee method is usually more suited to Creditors with more cases that are smaller in size and therefore don’t justify a greater level of effort at a greater cost.

Final Fee Considerations

An agency’s success rate is typically more important than their contingency rate. A creditor typically is going to be better off hiring a commercial collection agency that charges 20% and has an 85% success rate than one that charges 18% but has a 50% success rate. As with almost everything else in life, it is important to look at costs but even more important to look at quality to pick the right combination that fits your situation. Our success rate is more than double the industry average, and we can point to specific reasons why that is the case. If a company owes you $10,000 or more, we’d be happy to use our industry-leading approach to recover your money.

Ready To Collect Your Money?