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Allan is the cofounder of LessAccounting, loves his family more than breathing and builds weird lamps for fun.

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Hiring a Collection Agency for Unpaid Invoices

Written by on Mar 5
Hiring A Collection Agency

Your client hasn’t paid the invoice you sent them and it’s really late, so now what?

Let’s start with a hypothetical situation. “Beachy Design Studios,” a Florida-based design firm, lands a big awesome website project in 2011 with “Mountain Top Hotel,” a Colorado-based hotel chain. Beachy Design Studios uses a service contract and Mountain Top Hotel signs the project, pays the deposit and the project starts. The contract is an hourly one and the client pays each month after receiving an invoice. After six months, Mountain Top Hotel gets behind on their payments, and after another 30 days of work Beachy Design Studios stops work.

Hmmmm, okay…now what?

Beachy Designs Studios tries to collect on these unpaid invoices, calls the client, and gets nothing. The client doesn’t want to pay anymore.

Now what? It’s time to take legal action.

Send a Demand Letter, Before Hiring a Collection Agency

Beachy Design Studios sends a demand letter to the client, which is a mailed, certified letter written by their attorney that…yep…you guessed it, demands their money or threatens legal action. Read this article on writing a demand letters.

Common Question #1: Will a demand letter work?

Lawyers love to say, “It depends,” and the same applies here. It really depends on the situation. Most lawyers will ignore demand letters from opposing counsel. You might just be wasting time here, but who knows? Maybe the client will fork over the money you’re owed.

Common Question #2: Do you send multiple letters?

You could send a number of letters but it may or may not help. It really depends on the kind of person you are dealing with. If the person doesn’t respond to you, we doubt a demand letter (or multiple demand letters) will serve any real purpose. At the same time, it could provide the necessary jolt they need to get off their feet and take you seriously. It could force the client to call you and say, “Hey, let’s forget this whole ordeal, I am sending you a check right now.” Or it could lead to, “Who is this guy? Ignore this, this is a joke.” Either way, you can go through the motions of a demand letter and see how it plays out, or you can dive straight into the meat of things.

This letter could serve the “negotiation” element to your case. It will help you shape the issues and arguments you can potentially use in your case while conveying to the other side your specific goals and objectives. At first bite, it shows the other side that you have legal representation and provides notice of a claim. It subtly sets the tone for the negotiation.

FYI: here comes some service contract legal jargon.

In Beachy Design’s situation, there is a contract that has a requirement for negotiation as a first step and when that fails, arbitration. The great thing about this contract is that the arbitration clause has a provision for arbitration expenses and attorney fees to be paid by the client (the defaulting party) and not the service provider. This means the out-of-state company, in addition to figuring out arbitration in a completely different state, will have to cough up expenses for both sides.

From a practical perspective, the client may not want to deal with this expense and may give in. We cannot predict how the client will react, but if we were in this situation, we’d probably be better off just paying our service provider. In the alternative, if the service provider chooses to file a complaint in a Florida court, the client, since he is out of state, still has to find a local attorney to defend him or her in Florida. The purpose of this language in the contract is so the past due client will think, “OMG the fees are going to cost me so much money, I’ll just pay my bill.”

Option 1: Lawyer Up

You may be better off pursuing your legal options. Here’s how to find and hire a small business attorney. We’re not going through legal scenarios because that depends on your service contract and how your attorney wants to handle this situation.

Option 2: Hire a Collection Agency

Finding a collection agency is similar to finding a lawyer.

Questions To Ask When You Hire a Collection Agency:

  • Do they have experience in similar situations to yours?
  • Who is your contact at the agency?
  • What will they need from you?
  • What fees do they charge?

Typical Collection Agency Fees

  • Percentage of Collected Debt: If you hire a collection agency, they might agree to retain 30% of the debt collected, which means if they are only able to recover 60% of your debt, 30% goes to them. For instance, on a $100 debt, the collection agency fee of 30% means they get $30 even if they only collect $60.
  • Buy the debt: If the collection agency buys the debt from you, they will probably buy it at a very low cost. Example: If you are owed $30,000 from a client, the debt collection agency may buy it for as low as $10,000. It really is your choice–would you rather take the $10,000 now and get rid of the client, or would you rather take the trouble of negotiating directly with the client?

Remember a person’s typical reaction to a collection agent is usually, “Go to Hell.” On the other hand, a lawyer may be able to instill some more fear because no one likes to be sued or have a bad credit report on file.

“Winning” a Judgment

Even if you go through these legal hassles with the client and you win a judgment or an arbitration award to receive your money, you still need to take measures to collect the money.

A collection agency might be willing to pay a higher amount for a judgment. Example: You are owed $30,000. You get a judgment for $30,000 but client does not pay off the judgment. You need to take steps to enforce the judgment and since the client is in another state, that means hiring local counsel in that state to help you enforce the judgment. A lawyer or collections agency may be able to help you with this. If you have a judgment in hand, the collection agency may be willing to buy your debt at a higher amount, greater than the initial $10,000 we mentioned above. Again, these are decisions that you need to make. It could mean waiting longer to actually get your money, but it may be worth it if it means a higher payout.

Key takeaway: Consult your local attorney (Florida in this situation) and negotiate with the client directly to settle the matter. In the event negotiation fails, your next step is to initiate arbitration. As an alternative, you can hire a collection agency or sell your debt to a collection agency, but there is no guarantee you are going to get all your money back. At the end of the day, determine what is important to you in order to make a decision that YOU are most comfortable with.

DISCLAIMER: This article is just friendly advice and only reflects the personal views of a few ‘ordinary’ people. It may not be the kind of advice that you agree with, nor prove to be helpful for your situation. This article is not a substitute for legal advice from an attorney in your own state. By using this website, you understand that there is no attorney-client relationship between you and the author. We encourage comments and viewpoints but try to be nice!

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