When you decide to hire a commercial debt collection agency, one of the first things you should discuss with them is their fee structure.
In many cases, they will be charging you based on their contingency rates, which are also referred to as conditional rates. In order to have a good understanding of just what that means, we need to cover the basics first, and then dive deeper into how this type of structure can be an advantage for your business.
What is a Contingency Rate?
While it might sound like an overly technical term, a contingency rate is actually quite simple to understand. It basically means that someone is willing to work for free under the agreement that they will be entitled to a portion of whatever profits they produce. Regarding debt collection, that means that the collection agency only gets paid if they can produce results in the form of payment from outstanding debtors.
The actual percentage that a debt collection company charges will vary depending on a number of situations. However, it is always recommended that you work out the exact details of the arrangement before giving the agency the authority to conduct collections on your behalf.
Advantages of Contingency Rates
Based on the fact that a collection agency working for a contingency rate is only going to charge you if they deliver on their collection efforts, the biggest advantage in using this type of payment structure is that you won’t owe them a dime if they fail to deliver. This puts all of the risk in their court and allows you to sub out the task of debt collection without any upfront costs.
When you are working with a debt collection agency on a contingency rate basis, any amount you end up owing them is, by definition, going to be less than the amount that they have collected on your behalf. That means that this arrangement is always going to have a positive expected value for your business.
Another huge advantage of working with a company on a contingency rate basis is that their goals are 100% in line with yours. It will also allow you to let someone else devote their time to tracking down your outstanding debtors so that you can spend more of your time focused on building your business.
Disadvantages of Contingency Rates
Contingency rates sound like a pretty fantastic deal for anyone looking to hire a debt collection agency, but there must be some downside to hiring an agency in this way, right?
Actually, the only disadvantage is that you have to pay them for any work they deliver. If you had the time and energy to manage your own collection accounts, you would obviously be better off financially to do just that. But managing outstanding debts is a nightmare, so paying professionals to do it for you is often well worth the expense.
The debt collection industry is one of the few industries where even the very best companies are willing to work based on contingency rates. This gives the companies who hire them an entirely risk-free partner for outsourcing their debt collection efforts. And since debt collection is one of the biggest headaches for any business that extends credit to its customers, hiring an agency is almost always worth the cost.