Why Percentage-Based Collection Models Cost You More

Businesses in Texas, Florida, and across the United States often ask, "How come it's expensive if we are paying a collection agency only on a percentage basis?" The answer is simple: percentage-based debt collection models take away a large portion of what you recover. Over time, it reduces your profits and growth opportunities. Therefore, choosing a flat-fee collection agency may be a better alternative to keep your expenses predictable.

How Do Percentage-Based Collection Models Work?

In a contingency-based debt collection model, the agency charges a percentage of what it recovers. Ideally, it ranges from 20% to 50%, depending on the balance size and the age of the accounts.

For example, if you have $10,000 in past-due invoices and the agency charges a 35% contingency fee, you recover only $6,500, and the remaining $3,500 never returns to your cash flow. If your profit margin is 15%, you would need to generate over $23,000 in new sales to replace that lost revenue, which can be burdensome if you are a smaller business.

Do Flat Fee Collections Often Cost Less?

Flat-fee collections for past-due invoices often cost you much less than a contingency-based pricing structure. This is because you pay a fixed rate rather than a percentage. So whether the invoice is $2,000 or $20,000, your cost doesn't increase with the recovery. This approach is suitable when you have multiple recent overdue accounts, and you expect predictability when budgeting. 

For example, if you have 200 accounts and the flat-fee collection agency charges $50 per account, your total cost will be $10,000. Even if 70% of these accounts are recovered, your net return will be higher. This difference can help you fund your inventory, payroll, and future expansion opportunities.

Is Outsourcing a Better Choice Over In-House Collections?

Yes. Several reports suggest that early intervention by a reliable, reputable accounts receivable management firm improves payment outcomes. An accounts receivable outsourcing service provider can help you manage billing, follow-ups, and payment reminders before any accounts get delinquent. They can enable faster invoicing, lower DSO, and improved communication. Outsourcing accounts receivable prevents debt from aging into a high-risk category. As debts age, the contingency percentage increases, and your costs rise significantly.

Protect Your Revenue With Professionals Before It Shrinks

If your business is experiencing a higher percentage of outstanding invoices, it may be time to consider a flat-fee collection structure. It can help increase your net return, improve cash flow, and reduce your financial stress. Working with professionals helps you stay compliant, expect timely recoveries, and keep more money in your accounts receivable pipeline. Review your current recovery costs today, calculate the percentage fees that have cost your business over the last 12 months, and implement a better, smarter, and more cost-controlled collection strategy.

Key Summary 

Percentage-based collections may seem less risky as they have been the norm, but they can reduce your net recovery and profit margins. Flat-fee structures, on the other hand, have predictable costs and deliver higher long-term returns. Early action and professional support can protect the revenue you can recover and consistently outperform businesses that rely on high-percentage contingency fees.