You and Your Collection Agency - Protect Yourself by Asking These 14 Questions
Mike Lawrence
If you are like most credit grantors, you are constantly bombarded with solicitations from collection agencies. Most use slick and very convincing presentations. Some advertise that they are members of the Commercial Law League of America, the American Commercial Collectors Association or the American Collectors Association. On paper, they all sound terrific, but even an agency that you have done business with for years, with no apparent problems, needs to be monitored on a regular basis in order for you, the credit executive, to fulfill your fiduciary responsibility to your employer. By asking the following simple questions and demanding clear answers, you can go a long way toward protecting yourself from both unscrupulous agencies and those whose fortunes may have changed dramatically. Question 1: Are you bonded? If so, for what amount? Under no circumstances, should you ever do business with an agency that is not bonded. Many states require no bonding, and some require a bond of only $10,000 to be licensed. To be seriously considered, an agency should have a bond of at least $100,000, although a bond of $1 million is much better and safer. Question 2: Are you insured? Obviously the answer to this question should be "yes." But, what types of insurance are important to you, the credit grantor? Agencies should have errors and omissions insurance, directors and officers liability insurance, a commercial umbrella liability policy, and a fidelity bond crime policy. These policies should all be in the million dollar range, with the commercial umbrella liability somewhat higher. Also, any agency should be willing to forward insurance certificates to you. At a minimum, they should be willing to have the policies examined by you or your representative. Question 3: Do you have an annual, independent certified audit? This is one of the easiest ways to ensure, year to year, an accurate picture of how your agency is performing both financially and as a fiduciary. An independent certified audit will require that the auditor test the various books and records to make sure the agency is charging the proper fees, remitting the money properly, not mixing your funds with other funds, or using your funds to pay its bills. It will also tell if there have been any substantial changes in the business operations of the agency, such as pending lawsuits or tax liens. Question 4: Would we be able to audit your agency at any time? Many large credit grantors do audit their collection agencies, and I believe this to be a prudent and desirable practice. Any agency that will not allow you to make such an audit should be avoided. Question 5: Do you use attorneys associated with the Commercial Law League of America and only those who are bonded? The answer to this question should be "yes." Wherever possible, use CLLA attorneys or those that are listed by one or more of the law-list registries, such as the Commercial Bar, the American Lawyers' Quarterly, or the Columbia Law List. Those mentioned above are covered by a fidelity bond, a useful safeguard should an impropriety occur. Question 6: Do you have a toll-free telephone line? Qualified agencies should have an 800 number and be happy to provide it to you. Question 7: Do you require companies to sign a contract? Generally, you should not have to sign a contract to do business with an agency for an extended period of time. Each account or group of accounts that are placed with an agency is covered by a placement agreement. Any other type of contract simply binds you to using an agency that you may not wish to use in the future. Question 8: Do you deposit collection checks in a separate trust account? This is a very important question. Some agencies do not establish trust accounts, thereby putting your money at risk should the agency be sued or the funds seized because of a judgment, tax levy or other legal procedure. You should absolutely avoid any agency that does not have a separate trust account for collection checks. Question 9: Do you hold checks for a period of time prior to remittance? Many agencies remit once or twice a month. Unless it is for your convenience, you should insist that your money be held no longer than 10 working days from the date that it is received and deposited. Certified checks, cashier's checks and checks from attorney trust funds should be remitted immediately. Many agencies make additional profit by holding your monies for a longer period of time, while drawing interest on those monies. Question 10: How many years have you been in business? While there is nothing wrong with dealing with a new agency, it is a fact that many new businesses do not survive. Stability and perseverance are important traits in any agency. Check the financial stability and the references of a "young" agency thoroughly. Question 11: Do you offer individual checks for each debtor remittance? The answer to this question should be "yes." It is a favorite tactic of those collection agencies who want to use your money to claim that they must remit to you in one single check once or twice a month. Unless this is convenient for you, don't agree to those terms. Question 12: Do you offer a 10-day free demand letter? This simply means that to be considered, an agency would agree to send a single collection letter on their letterhead requesting that your account be paid in full within 10 days. Should you receive a check from the debtor within that period of time, there is no fee for the service. Obviously, if you do not receive payment within that time frame, the account will then be handled by experienced collectors. Should the check be received after the 10-day period, you would pay the normal collection fee. Question 13: What is a reasonable fee? There is no simple answer to this question. For a standard non-disputed commercial claim that is fewer than six months past due, a reasonable rule of thumb is that you should pay no more than 25 percent of the first $2,000 collected and no more than 20 percent of the remaining amount that is due on that account. If your account is more than $50,000, or if you are giving the agency a significant number of placements each month, special rates are often negotiated. It is important to note that rates, unless outrageously high, are probably the least important measure of the desirability and the effectiveness of a collection agency. The only way to reasonably measure an agency's performance is to compare the percentage of dollars collected to the amount that is placed. A very small increase in the percentage of dollars collected more than makes up for any difference in fees charged. In other words, "Sometimes, you get what you pay for." Question 14: Do you have on-line computer accessibility? If yes, what is the cost and/or charge for installation and use? Today, an agency, in order to be considered, should be accessible on-line. There should be no charge for this service. You should also be able to place accounts electronically at no charge. Although no amount of diligence and work can offer you 100 percent protection, following these simple steps will guarantee you the maximum protection from unnecessary and preventable losses when dealing with a collection agency. Many reputable collection agencies can successfully pass the acid test of the above inquiries. It is expensive and time consuming to provide such safeguards to our clients, but we believe that it is both necessary and proper for their protection.
Michael Lawrence was formerly the Chief Operating Officer of NACM Southwest, Dallas.
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