By Chris Cappuccilli
With more than 29 years of experience in debt collection and more than 17 years of experience as a CEO, I have been asked a lot of questions over the years about how a collection agency works. So, I thought I would answer the questions asked most.
Did you know that most good collectors at a commercial collection agency rely on commission checks that typically make up to 40% of their annual base pay? Compare that to consumer collectors, which is around 10%.
When selecting a collection agency, it is imperative that, whomever you choose, you select one that pays at this scale. The good collectors will always demand a higher commission structure vs. a higher base pay because they know they can make more money in the long run, thus, benefiting you, the client. Collectors are paid bonuses on a monthly basis for fees generated, not gross dollars collected.
If you were to watch the flow of money that is collected during the course of the month like I do, you would notice that around 30% is usually collected during the last week, as the collectors push the hardest to get a bigger bonus check by month end. Also, it is important to understand that collectors know the contingency fee that is charged to the client and tend to work the clients with the higher contingency fees harder than the lower ones.
The biggest challenge with a collection staff is the balancing of the collection desks by collector. You must have the optimum number of accounts in a desk that will give you the highest recovery for the clients. If a collector has too many accounts, the collectors will “skim.”
The biggest challenge for operating a collection agency is that the contingency rate has dropped over the years to an average of 12% to 15% of dollars collected where it used to be 20% to 25%. Technology and software has helped push the rates down over the years, as a collector can handle two to three times more accounts today than in 1980, justifying the lower rates we see today.
But, do you ever wonder why your small balance accounts seem to be less collectable than the large balance accounts?
Most commercial collection agencies split accounts into three desk sizes: large, medium, and small balance desks. Large balance desks are always handled by the most experienced collectors and the medium and small balance desks are handled by less experienced and newly hired collectors.
Most collection agencies, even with the advances of software, have a hard time making money on small balance accounts because of the lower contingency fees charged, thus, less recovery overall. On accounts below $1,000, the financial point of no return is reached in half the time of a larger balance account.
Have your litigation costs gone up, but your litigation recoveries declined?
With the contingency fees being so low and the U.S. economy still flat, a lot more collection agencies have pushed files, more than ever, to litigation simply because they cannot afford to hold them open any longer at the rates they are charging their clients. The problem with litigating is that non-contingent suit fees have increased by the attorneys that work the files because the collectability has declined, so, they are trying to make up for the shortfall somewhere. Adding to the problem is that the states and counties are out of money, so the actual court costs have gone up as well.
The greatest mistake made is collection agencies constantly litigate on accounts that simply do not have the ability to pay and the uncollectable judgments just pile up, as well as the additional money you advance to litigate.
So, are you wondering how long a file should be worked before going to litigation?
That is determined different on a case by case basis. There are few dos and don’ts to follow if you are considering when to litigate:
First, only litigate accounts that are in business and have the ability to pay. I know sometimes this is hard to determine, but a good collection agency with a good asset locating department is always your best bet.
Time and total number of contacts are the other factors. An account that has been open for more than four months, being called by two different collectors for a total of 10 times between them, should go to litigation. I have always asked myself, what do you say to a debtor on the eleventh call that you did not already say on the first 10 calls? The answer is, not much more.
Chris Cappuccilli is the CEO of Brown & Joseph (brownandjoseph.com) and played a key role in the founding of the company in 1996. Brown & Joseph is SSAE No.16 certified, a member of the CCAA, certified by the CLLA, and a member of the ACA International. Additionally, the company has received the award of Best Places to Work in Collections twice, in 2008 and 2010. Cappucilli was invited to speak at the United States Department of Treasury in Washington, D.C. at the Government Management Financial Conference in 2010. He continues to spend his time educating employees, clients, and others in the credit and collection industry.
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