The objective of this article isn’t just to answer the question “What is a third-party debt collector?”, but to help you understand their role in today’s predominantly digital landscape.

The reality is that tools like automation, AI, Machine Learning, and many other significant technological advancements are starting to democratize how we approach debt collection, making it easier and more accessible than ever for business owners. This situation gives room to one critical question: Are these advancements sidelining traditional collection agencies (A.K.A. third-party collectors), or is there still a place for them?

In this article, you'll learn all about the role of third-party debt collectors. We'll explore the advantages and disadvantages of resorting to a debt collection agency as a business owner, to understand whether you need to consider it a viable option, or if technology alone can handle the task. It's a fresh look at a subject that's vital for businesses navigating the modern financial terrain.

What is a Third-Party Debt Collector?

An infographic showing the role of a third-party collector in the collection process between businesses and creditors

So, what exactly is a third-party debt collector? Let's break it down.

A third-party debt collector is a specialized company, usually a collection agency, used by a company to recover money that has not been repaid on time. Unlike the original creditor, who has provided a loan, product, or service, this third-party agency is brought in specifically to recover unpaid debts. It’s a specialized team, separate from the original contract, whose sole focus is to pursue the debtor and collect the outstanding balance.

This debt collection agency acts on behalf of the creditor, allowing them to hand over the often complex and time-consuming process of chasing unpaid debts.

How do third-party collections work?

Understanding how third-party collections work is essential for SME owners, as it provides insight into a process that might become a part of their financial management strategy. So, how does it all unfold?

  1. Identifying Account: The creditor identifies an account, or group of accounts, that present a collection challenge outside their capabilities and need specialized attention for debt recovery.
  2. Account Placement: The creditor transfers the account to a third-party collection agency, which takes over the day-to-day management, including communication and collection activities. This transfer is commonly known as “sending someone to collections.”
  3. Status Update: The creditor's system marks the account as closed or placed, directing all communication between the third-party agency and the debtor to ensure a streamlined process and limiting the creditor's involvement.
  4. Real-Time Communication: Accurate, real-time updates between the creditor and the agency are maintained to ensure compliance with regulations.
  5. Account Verification: Upon receipt, the agency verifies the account's eligibility, gathers accurate data, and loads it into its database.
  6. Recovery Techniques: The agency employs various methods, such as letters, emails, phone calls, and credit bureau reporting.
  7. Negotiation and Settlement: Acting as a bridge between the creditor and the debtor, the agency may secure full payment, negotiate arrangements, or agree on a settlement amount.
  8. Contract Duration: The agency works on the accounts for a specified time. Unresolved accounts are returned to the creditor, who may choose a different agency.

Advantages and Disadvantages of hiring a third-party debt collection agency

An inphographic of the advantages and disadvantages of hiring a third-perty debt collector

Hiring a third-party debt collection agency should not be taken lightly. It's a step that can benefit the business, especially when dealing with stubborn unpaid debts, but it also has some risks that need consideration. 

Advantages of hiring a debt collection agency

Here are the main benefits of engaging a third-party debt collection agency:

  1. Recovering money: One of the most obvious but compelling reasons to consider a third-party debt collection agency is its ability to recover funds that might otherwise be written off. These agencies have proven strategies to motivate debtors to pay, and the expertise in handling various situations usually leads to more effective collections than any in-house efforts you might be willing to try.
  2. Handling Challenging Accounts: Sometimes, despite having well-designed internal processes, some accounts prove to be particularly tough. If you've implemented a clear payment collection policy and enforced it rigorously, you may still encounter cases that require specialized handling. Here is where a third-party agency can step in, applying their expertise to recover funds from the most challenging accounts.
  3. Legal Protection and Compliance: Third-party debt collection agencies are experts in their field. They understand the legalities and best practices of debt collection, ensuring the process is handled professionally. Compliance with regulations is crucial, and these agencies have the knowledge and tools to navigate the complex landscape of debt collection law.

Disadvantages of hiring a debt collection agency

While hiring a third-party debt collection agency can be a powerful tool for recovering outstanding balances, it's not without its drawbacks. 

  1. High costs: Hiring a collection agency can be an expensive affair. The fees can range from 20% to 50% of the amount collected. For some businesses, especially those with smaller debt amounts, this cost might outweigh the benefits. 
  2. Low success rate: The success rate of debt collection agencies might not always meet your expectations. With an industry-wide success rate of 21.7%, they may only recover around $20 for every $100 owed. This, added to the high operational fees, translates to a bottom-line recovery rate of 10% to 15%, generally speaking.
  3. Damaging Relationships: Debt collection can be a sensitive issue, and the way it's handled can leave a lasting impression on your customers. Always remember that the agency represents your practice in the eyes of the debtor. If the collection agency uses tactics that are less than professional, it can lead to hard feelings and damage your business's reputation.

The best alternative to hiring a collection agency

If the collection rates are low, and the fees are high, why are collection agencies still in business?

The logic is simple: Something is always better than nothing. A lower fee on zero dollars collected is still zero, so even a small recovery is seen as a win. However, the landscape of debt collection is evolving, and new alternatives are emerging to challenge this approach.

Technology is now paving a new path for collections, a path that capitalizes on efficiency, lower manual work, reduced fees, and higher returns for SME owners. Automation and AI are revolutionizing the way businesses approach debt collection, making first-party collections not only a viable but more beneficial alternative.

At Arrears®, our sole focus is to empower businesses to take full control over their cash flow through technology. We offer the tools that will make you able to craft, customize, and send efficient collection campaigns in minutes, access a variety of communication channels and payment options, personalize outreach at scale, and much more. 

It’s about time you take the fast lane to growth acceleration and revenue predictability. It’s about time you choose Arrears®.