Hiring a debt collection agency: When and how to do it right

When a customer consistently fails to pay, you may need to consider hiring a debt collection agency. But what exactly does such an agency do? And are there more customer-friendly alternatives?

In this article, you’ll learn when it’s wise to hire a debt collection agency, the steps involved, alternative solutions, and why with Payt, you often don’t need a collection agency at all.

Table of contents:

1. What does a debt collection agency do?
2. When is hiring a debt collection agency advisable?
3. Step-by-step guide to hiring a debt collection agency
4. What are the alternatives to a debt collection agency?
5. Why Payt is an alternative to hiring a debt collection agency
6. Frequently asked questions about hiring a debt collection agency

What does a debt collection agency do?

A debt collection agency is a company that attempts to collect outstanding debts on behalf of creditors. When your own payment reminders and notices have no effect, a collection agency can contact the debtor to enforce payment.

Under the Fair Debt Collection Practices Act (FDCPA), collection agencies are prohibited from using abusive, deceptive, or unfair practices to collect debts. They cannot, for example, threaten legal action without proper authority or contact debtors at inconvenient times.

If payment still isn’t made, legal action may be necessary, which typically involves hiring an attorney or pursuing the matter in court.

When is hiring a debt collection agency advisable?

Hiring a debt collection agency isn’t the first step but can be prudent when previous attempts to secure payment have failed. Consider engaging a collection agency in the following situations:

• You’ve sent multiple reminders and at least one formal notice, but there’s still no response
• The agreed-upon payment term has significantly passed (e.g., over 30 days)
• The customer no longer responds to emails, phone calls, or letters
• You lack the internal resources to manage accounts receivable effectively

Step-by-step guide to hiring a debt collection agency

Engaging a debt collection agency is a serious step in the accounts receivable process. By approaching this systematically, you can avoid errors, comply with legal requirements, and increase the likelihood of successful debt recovery. Here’s a comprehensive step-by-step guide:

Step 1: Review the Invoice and Customer Information

• Ensure the invoice is complete and accurate (amount, payment terms, customer details)
• Verify that the payment term has indeed expired
• Check if the customer has previously communicated any payment issues

Step 2: Send at least one clear payment reminder

• Dispatch a written reminder once the payment term has lapsed
• Clearly state the outstanding amount, invoice numbers, and a new reasonable deadline (e.g., 7 days)
• Maintain a professional and courteous tone

Step 3: Send a formal demand letter

If payment remains unpaid, issue a formal demand letter include the following:

• A statement that payment is overdue
• A warning that failure to pay may result in collection efforts or legal action
• A final deadline for payment

Step 4: Compile all documentation

Before transferring the case to a collection agency, gather all relevant documents:

• Original invoice and any reminders or demand letters
• Correspondence with the customer
• Any agreements or terms and conditions

Step 5: Choose a reputable debt collection agency

When hiring a collection agency, it’s crucial to select a reputable firm. Since they will represent your company, their conduct can impact your business’s reputation. Seek recommendations and verify their compliance with the FDCPA.

Step 6: Transfer the case to the collection agency

Submit the complete case file (digitally or through a secure connection)
Establish clear agreements regarding:

• Timeframes
• Fee structures
• Reporting and follow-up procedures

Step 7: Monitor progress or escalate if necessary

If payment is still not received, the collection agency may advise escalating the matter to:

• An attorney (for legal proceedings)
• Court action (to obtain a judgment)

What are the alternatives to a debt collection agency?

Here are three alternatives you might consider instead of a collection agency:

Why Payt is an alternative to hiring a debt collection agency

With Payt’s software, you can automate reminders, notices, and communication with your customers. You maintain full control over the process, while your invoices are paid faster. If your customer still doesn’t pay, you can easily escalate to a collection process or even legal proceedings through Payt.

Advantages of Payt over a collection agency:

• Faster payments: Invoices are paid on average 30-50% quicker
• Time savings: Save up to 80% of your time through automation
• Customer-friendly: Communication remains professional and transparent
• Control: You decide when to escalate and whether to charge collection fees
• Certified security: ISO 27001-certified data management

Curious about what Payt can do for your business? Download our brochure below.

Frequently asked questions about hiring a debt collection agency