How To Choose a Collection Agency for Your Small Business

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Getting customers to pay is one of the most difficult tasks for a small business, but also one of the most important. If you can't collect from customers, you may not have enough money to stay in business. As an option, you may want to consider outsourcing your collections to a debt collection agency.

This article discusses how collection agencies operate, what to ask before you hire one, and some tips for selecting the best one for your business.

What Is a Debt Collection Agency?

Debt collection agencies are a type of debt collector. They are for-profit businesses that specialize in collecting unpaid debts.

Collection agencies must be licensed by most U.S. states and some cities, and each state has its own requirements. Some states require collection agencies to get a bond or a certificate of authority (registration to do business in that state).

How Collection Agencies Work

The most common way these collection agents work is for the business to turn over the names and information of the debtors to the agency. The agency then attempts to collect the debt and gives back the amount collected to the company, less their fee.

Most collection agencies work on a contingency fee basis, meaning that they receive a percentage of the amount they collect. This payment method gives them an incentive to collect because no collection means no money for either the business or the collection agency.

Sometimes collection agencies will negotiate with debtors to accept a lower fee. Since your business still owns the debt, you can accept the lower fee or take it back and continue to work on it if the collection agency fails.

Debt Collection Regulations

The federal government regulates debt collectors through the Fair Debt Collection Practices Act (FDCPA) for personal debts. However, the FDCPA doesn't regulate collections for business debts.


These regulations apply to anyone attempting to collect a debt, including collection agencies, your employees working on collections, and you as a small business owner.

If your customers are businesses, debt collectors aren't limited in what they can do to collect a debt owed by a business. This doesn't mean they can use illegal practices like threats and fraud.

If your customers aren't businesses, and the debt is for personal, family, or household purposes, the FDCPA regulations apply. A bill collector cannot:

  • Call before 8 a.m. or after 9 p.m.
  • Call at work
  • Harass, oppress, or abuse someone
  • Lie or make false statements
  • Use unfair practices
  • Conceal identity
  • Disregard a written request to cease contact

If the debtor is represented by an attorney, the collector must stop direct contact and only work through the attorney.

Alternatives To Hiring a Collection Agency

You have several other options for collecting on debts owed to you by customers. You may also decide to use one or more of these alternatives, depending on the individual circumstances of each debtor.

Collecting on Your Own

Some people will pay only if you push them, and others just won't pay–ever. Your job as a business owner is to set up good procedures so you can collect money from customers yourself. Having a collections management system that you run yourself will get you money faster and easier, and at low expense. Be sure to brush up on the laws relating to collections to protect yourself.

Going to Small Claims Court

Small claims court is a possible way to get people to pay if the debt amount is small and the debtor is local. The process is simple and inexpensive. If you have the documentation that the work was done or the product was delivered, you have a good chance of getting the court to agree. Then you must persuade the court to give you a judgment (a court order) so you can get paid.

Selling the Debt

Accounts receivable factors are businesses that buy debt outright. In this case, you have no control over how the factor collects on the debt. Usually, this works best when you have many receivables and you need money quickly. The cost is based on a percentage of the total amount collectible based on the value of each individual debt (how difficult it will be to collect).

Hiring an Attorney

You could consider hiring an attorney to collect a specific debt. But they may not take the case if the collection agency hasn't been successful. Attorneys charge high fees, but a letter from an attorney can provide a boost to a debtor.

How To Choose a Collection Agency

To find a collection agency, you can search locally or look online. You want a company that's a good fit with your business and has good ethical collections practices.


Check with your state's office of financial regulation or consumer affairs office to see if collection agencies must be licensed. Then check to make sure agencies you are considering have licenses. If an unlicensed collection agency harasses your customers, you could be liable if the customer sues.

Some tips for researching collection agencies:

  • Ask how the agency tracks and finds debtors.
  • Ask them to show you a typical script they use.
  • Check the reviews online for local agencies.
  • Check the company's Better Business Bureau record and rating.
  • Look at Consumer Affairs (a private company that rates collection agencies).
  • Contact your state's attorney general to check on state laws and lawsuits against this agency
  • The Consumer Financial Protection Bureau administers the FDCPA and it takes complaints. You might be able to check on complaints against an agency you are considering.

Frequently Asked Questions

How much does it cost to hire a collection agency?

Collection agencies charge fees based on how difficult it is to collect. Their fees are usually calculated as a percentage of the amount collected. Fees based on the size of the debt can be from 50% for larger debts to 10% for smaller ones. It's more difficult to collect debts the longer they are overdue, so the collection agency may charge you up to 50% for debts that haven't been paid in a year or two.

What are the benefits of using a collection agency?

Collection agencies are a good alternative in several situations:

  • When you can't find a customer
  • If the person's debt is larger than your state's limit for taking a debtor to small claims court
  • When you have several hard-to-collect debts
  • If you know you don't want to have any dealings with this customer again

But you may not want to use a collection agency if you need to have a continuing relationship with this customer, because they may stop doing business with you if you send a "bill collector" after them.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. CreditInfoCenter. "State by State Collection Agency Requirements." Accessed August 13, 2021.

  2. The Kaplan Group. "How Much Does a Collection Agency Charge?" Accessed Aug. 13, 2021.

  3. Consumer Financial Protection Bureau. "Are There Laws that Limit What Debt Collectors Can Say or Do?" Accessed August 13, 2021.

  4. Invoice Factoring Group. "An Invoice Factoring Guide for Business." Accessed Aug. 10, 2021.

  5. The Kaplan Group. "How Much Does a Collection Agency Charge?" Accessed August 13, 2021.

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