Consumer debt reached $3.71 trillion in 2016, a new record high according to the Federal Reserve’s Board of Governors. When accounts go unpaid, businesses pay the price. To recover revenue and optimally manage all accounts receivable, many businesses choose to hire a debt collection agency.
Average Costs of a Debt Collection Agency
Hesitations due to unknown costs may deter businesses from signing on with a debt collection agency, which can further delay collections. With over 5,000 agencies operating within the Unites States, the cost of hiring one will vary. Two common payment structures include flat fee and contingency costs.
Flat Fee Collections
A flat fee is a fixed fee that is charged upfront in the collections process. Regardless of account size, businesses pay a consistent rate for packages that include either first or third-party collections services. This straight-forward fee generally costs $10 to $15 per account.
First-Party and Third-Party Collection Services
First-party collections appear to be originating from clients. This method provides letter writing and phone calling services. Each agency operates with unique procedures. Letters may identify a consumer’s legal rights, demand payment, request that they contact the agency or creditor, update the creditor on the payment status, address disputes or inquire about other information.
For consumers who do not respond to first-party collections, businesses can activate third-party collections. This service also applies letter writing and phone calling strategies. At this stage, all communication is clearly stated as originating from a debt collector and or an agency. Both first- and third-party collections letters follow a structured escalation of demand with each letter increasing the urgency of payment.
Contingency Based Collections
Most collection agencies now use a contingency payment model. Agencies will only charge clients if they successfully collect. The average fee ranges from 25 – 50 percent of the total amount of debt collected per account. Fees are contractually agreed upon.
Factors that determine contingency fees include:
- The age of an account — as consumer debt ages, the likelihood of recovery decreases. Less than half of consumers with delinquent accounts make payments 30 or more days late, the Fair Isaac Corp (FICO) found. Furthermore, FICO states that “approximately three out of 10 consumers have been 60 or more days overdue on any credit obligation and approximately two out of 10 consumers have been 90 or more days overdue.” Due to the increased difficulty of collecting on aged debt, older accounts generally demand higher fees.
- The average balance size of accounts — depending on the debt collection agency, larger fees will be charged for accounts with smaller balances.
- The volume of accounts transferred over to an agency — fees may be lower for larger account volumes.
- The industry served — with varying approaches to debt collection, each industry has different volumes, averages and ages of accounts receivable.
Choosing the Right Agency
Timely and successful collection efforts demand essential company resources that many businesses cannot afford to spare. Outsourcing collections to a debt collection agency allows businesses to focus their resources on maintaining production and growing success.
At Optio Solutions, our expert debt collectors provide high-quality service to obtain ideal results. Optio offers effective first- and third-party collection services at affordable rates. Organizations considering outsourcing collections or those looking to replace a current agency may contact Optio today to discuss our individualized programs.