Using a Collection Agency for Unpaid Invoices

Credit: Yuri_Arcurs on Photodune

When collections are an absolute hassle, it’s nice to know that there’s an alternative — you can use a collection agency. It’s not a perfect option, but it can be better than spending all of your time chasing after a client for an unpaid invoice. And, since collections is all such agencies really do, they often have resources at their disposal that the average freelancer can’t match.

What a Collections Agency Needs from You

In order to start the collections process, the typical collection agency will want a copy of the unpaid invoice and the contract between you and the client in question. It is significantly harder to collect on a debt when you don’t have a contract in hand.

Some collection agencies ask for a fee upfront, but many work on a commission basis — they simply keep a portion of the money they bring in to you. It’s not ideal since you don’t get the full amount of your invoice, but the mindset is that at least some money is better than the absolute lack of money you will receive if you can’t pursue an unpaid account yourself.

In some cases, an agency may be willing to buy the debt — they’ll pay you a portion of what you are owed directly and then go after your client for the full amount at their leisure. With this approach, you’ll usually get less money overall.

Choosing a Collections Agency

There are both large and small collections agencies and, as a freelancer, it’s often better to go with a smaller firm. Large collection organizations usually expect their clients to bring them an entire block of debts to collect on at once — but if a freelancer has a large block of unpaid invoices, he’s already in some pretty hot water.

It’s also crucial to learn as much about the agency you’re considering working with. While all collection agencies essentially use the same methods (sending phone calls and letters over and over again), specific tactics vary. Some approaches can get downright unsavory, with, for instance, threats to sue. You don’t want to work with any collection agencies that could possibly damage your reputation.

You’ll want to ask any agencies you want to work with about their tactics, as well as get referrals and references. Don’t be afraid to search for them online, either.

Why Not Collect Unpaid Invoices Yourself?

It’s always worth trying to collect from your clients yourself, before referring the problem to a collection agency. After all, you get more of the money. But the simplest reason a freelancer might use a collections agency is time. If you’re the only one working on everything from landing new clients to completing projects, the truth is that you may not have time to handle unpaid accounts effectively.

Furthermore, the average collections agency has tools it can use that freelancers just don’t have the scale to afford. Many collection agencies maintain a call center staff trained at collections. They can also add information to a client’s credit report — which can, in turn, damage that individual’s credit. There are some teeth to back up the bark with a credit agency. You can always sue for an unpaid invoice, but since collection agencies will take unpaid bills down to around $30, it’s more cost effective for smaller invoices.

If you’ve got the time to spend on collections — perhaps you’ve only got one client who hasn’t paid up and you know exactly where to find him all of the time — it’s easy enough to send a few letters yourself. But if you struggle with the collections process (or you just don’t want to deal with the angry people often involved), it may be worth considering a collection agency.

Photo credit: Some rights reserved by Yuri_Arcurs.