Should I Use a Collections Agency? 6 Checks

Use a collections agency when four things are true: the customer does not dispute the work, the invoice is still fresh enough to collect, the amount is too big to write off, and suing or liening is not the better tool. If the customer is arguing about the tile, or the invoice is a year old, or your lien deadline is still open, an agency is usually the wrong call.

That answer is different for a contractor than for the freelancers and B2B suppliers most guides are written for. When the unpaid customer is a homeowner, federal law treats the balance as consumer debt, which changes what the agency can do, how fast it can move and what it charges you. When the unpaid customer is a general contractor or a property manager, you are in commercial collections, where rates are lower and the relationship cost is higher.

This is information for a business decision, not legal advice. Collection rules differ by state and province, so confirm yours before you place an account.

What a collections agency actually does, and what it cannot

A collections agency contacts your customer, demands payment, negotiates, and sends you the money minus its cut. It works in one of three ways, and they are not interchangeable.

Contingency placement. You still own the debt. The agency works it and keeps a percentage of what it collects. If it collects nothing, you usually owe nothing. This is what most people mean by "sending it to collections."

Sale, sometimes called assignment. The agency or a debt buyer pays you a fraction of the balance up front and owns the debt from then on. One r/smallbusiness user running a recruiting firm was owed $39,000 and was offered 22.5%, or $8,775, to transfer it. The top reply suggested a lawyer on an hourly basis instead, because the contract was signed and the amount justified it. Consumer debt sells for far less: the FTC's study of more than 3,400 portfolios found buyers paid an average of 4.0 cents per dollar of face value, with older debt selling for less.

Attorney forwarding. When letters and calls fail, the agency forwards the file to a collection lawyer near the debtor. The lawyer represents you, and nothing is filed until you authorize it and advance costs.

What an agency cannot do matters just as much for a trade business. It cannot record a mechanic's lien on your behalf; that right is yours and expires on a statutory date. It cannot make a workmanship dispute go away. And a traditional agency, as the U.S. Chamber of Commerce's small business guide notes, is not a law firm, so it cannot sue or represent you in court.

If you have not yet sent your own final demand, back up a step and work through what to do when a customer won't pay. An agency is an escalation, not a first move.

Check 1: Is this a homeowner invoice or a business invoice?

Sort the account before you shop for an agency, because the answer changes the law, the rate and the timeline.

The Fair Debt Collection Practices Act defines a consumer as "any natural person obligated or allegedly obligated to pay any debt," and a debt as an obligation "arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes." A roof on someone's own house fits that definition. A tenant improvement billed to a property management LLC, or a sub's invoice to a general contractor, does not, because the debtor is not a natural person.

The gray zone is a homeowner who owns rentals in their own name. The test is the purpose of the transaction, so tell the agency exactly what the job was and let it classify the account.

Here is what the classification changes once a third-party agency takes over:

The dispute window comes from 15 U.S.C. 1692g and the Regulation F validation rules, which end the validation period 30 days after the consumer receives the notice and let the collector assume receipt five business days after sending. The call frequency presumption is in 12 CFR 1006.14. The credit reporting rule is in 12 CFR 1006.30.

In practice, this means a homeowner account spends its first five weeks mostly on paperwork. That is not a flaw in the agency. It is the law, and it is one reason a contractor with a still-open lien deadline should not wait on an agency to see what happens.

Check 2: How old is the invoice?

The older the invoice, the less an agency can recover and the more it charges to try. Most of the value in a collection placement is gone by the time owners finally get fed up.

The best-known benchmark comes from the commercial collection industry itself. The Credit Research Foundation republished Commercial Collection Agencies of America data on the collection potential of a commercial account by how long it has been delinquent:

A second chart, attributed to the Commercial Law League of America and cited by the agency JSD, puts an account at 85% at sixty days, 74% at ninety days, 58% at six months and 27% at one year. The Kaplan Group says the likelihood of a write-off rises more than 1% every week from the first day past due.

Treat these as direction, not precision. They come from agencies and their associations, they cover commercial accounts, and the two charts disagree by several points at every age. No comparable public dataset exists for homeowner invoices. What every source agrees on is the shape: a steep drop between three and twelve months.

There is a second clock that matters more to a contractor. Your lien deadline is usually measured in weeks after completion, not months after the due date. If you have lien rights, work through when a contractor should file a lien before you think about an agency at all. An agency will happily send letters on day 50 of a 60-day lien window.

Check 3: What will it really cost you?

The headline percentage is the smallest part of the cost. Read the schedule, then read the terms, because the terms are where contractors lose money.

Here are two published schedules, pulled directly from the agencies' own pages:

Now the clauses that change the math:

• Withdrawal fees. AFM charges 10% of the principal balance on the placement date if you cancel an account, "regardless of the reason for such cancellation, including, but not limited to, pending settlement offers." Place a $4,200 homeowner balance, get a call from the customer the next week offering to settle with you directly, pull the account, and you owe $420.
• Direct payments. NACM Southeast charges commission on payments received before placement or during its free demand period "but not reported," and on accounts withdrawn after its final demand notice. AFM offers a free demand period of 10, 20 or 30 days, but only if you email notice of any payment before the period ends.
• Suit costs. NACM's terms say you must authorize any suit and "advance the necessary court costs and/or advanced fees requested," and warn that a debtor can file "a countersuit or frivolous defense." For a contractor, that countersuit is the workmanship claim.
• Clawbacks. One r/smallbusiness commenter who had used several agencies warned that "many have a clawback for 6 months," and that one agency "even tried to get us to pay it after the client didn't pay up."

Two worked examples

A $4,200 final payment on a bathroom remodel, 90 days past due. This is a consumer account. At AFM's 35% consumer rate, full recovery nets you $2,730. Apply the three-month benchmark of 68.9% and the expected value is about $1,881. Let the same invoice sit for a year and the rate jumps to 50% while the benchmark falls to 21.4%, for an expected value of about $449. Waiting costs you far more than the fee does.

A $14,000 balance owed by a general contractor, eight months old. This is commercial. On NACM Southeast's tiers the fee on full recovery is $500 plus $1,200 plus $1,020, or $2,720, a blended 19.4%, which nets you $11,280. If letters fail and the file goes to a lawyer at 25% plus a 10% suit fee, the fee on full recovery rises to $4,900, before the court costs you advance. And at eight months you are between the 51.3% and 37.5% benchmarks, which is a coin flip at best.

That second example is almost exactly the situation one r/smallbusiness owner described: a customer eight months behind on $14,000 who kept promising to pay "later, when business picks up again." The top reply said to warn the customer first that the account was about to go to collections or an attorney, noting that an agency "typically takes a pretty big chunk."

Check 4: Is the customer disputing the work?

If the customer says the work is wrong, an agency is the wrong tool. Agencies collect undisputed money. They are not built to argue about whether the grout lines were in scope.

Disputes are the normal state of consumer collections, not the exception. The CFPB received about 207,800 debt collection complaints in 2024, and 45% concerned a debt the consumer said they did not owe, the top complaint category every year since the bureau started collecting them.

Contractor accounts dispute fast. In one r/Contractor thread, a Florida homeowner said a plumber had done repiping on a $5,500 estimate, taken $2,000, and sent the remaining $3,500 to a collection company before finishing the valves and fixtures or sending a bill. The top-voted advice was to write to the agency disputing the debt and demanding validation, which stops collection until the agency goes back to the contractor for documentation. The homeowner was also told to photograph the unfinished work.

That is exactly how it plays out. The agency asks you for proof, the homeowner sends photos, and the account stalls with your fee clock and withdrawal clauses still in effect.

When the problem is a partial payment tied to a scope argument, use the playbook in what to do when a customer short paid the final invoice instead. When you expect a real fight over quality, you need a forum that can decide it, and the evidence to win it; how to document a job site dispute covers what to gather.

The flip side is encouraging. Where the debt is real and the customer is simply avoiding you, documentation moves money. One r/smallbusiness commenter described a friend owed $16,000 whose client ignored emails for months; once the agency asked for documentation, the CEO called the next day asking him to call off the agency, and he received about $14,000 after the agency's share.

Check 5: Can you live with the fallout?

Sending a customer to collections ends the relationship and can start a public argument. Decide in advance whether that is acceptable.

Commercial accounts. A general contractor who sends you three jobs a year is a customer, not just a debtor. As one r/smallbusiness commenter put it on the $14,000 thread, "if you send them to collections, you are effectively torpedo'ing the relationship," and "if they go bankrupt you'll have to get in line to collect." One owner juggling 11 invoices totaling about $18,400 planned to send only the accounts over 90 and 120 days to an agency, so the relationship with slow-but-recurring clients survived.

Homeowner accounts. The risk is reviews. When a homeowner on r/homeowners said a contractor was threatening to send an $800 bill to collections over what they called a botched job, the top reply said to leave the company one-star reviews on Google. You cannot contract your way out of that. The FTC's guide to the Consumer Review Fairness Act says the law protects people's ability to share honest opinions about a business in any forum, and that contract terms prohibiting honest reviews or threatening legal action over them are a problem. Plan a calm, factual public reply; our guide to responding to bad reviews as a contractor walks through it.

Credit reporting. For consumer accounts, the agency may report the debt if you authorize it. Under the Fair Credit Reporting Act, accounts placed for collection can appear for seven years, with the clock starting 180 days after the delinquency began. That is real leverage, and it is also why a homeowner who believes they do not owe you will fight rather than pay.

Check 6: Is the agency licensed, bonded and holding your money properly?

An agency is handling your customer's money and your reputation. Verify it before you sign, because some jurisdictions put the burden on you.

United States. Licensing is state by state, and several states regulate commercial collectors as well as consumer ones.

• Minnesota requires a collection agency license, and operating without one is a misdemeanor. The poster of one r/smallbusiness thread found Minnesota's rules strict enough that he "pretty much" had to use a Minnesota-based company.
• Texas requires third-party debt collectors to file a $10,000 surety bond with the secretary of state before collecting consumer debts.
• Florida requires commercial collection agencies to register and post a surety bond, separate from its consumer collection agency rules.

Canada. Ontario's Collection and Debt Settlement Services Act is not limited to consumer debt, and it binds you directly: section 24 says "no person shall knowingly engage or use the services of a collection agency" that is not registered. The agency cannot collect "any money in addition to the amount owing" under section 22, so its commission always comes out of your share. The province's guide for collection agencies adds that an agency must wait six days after sending written notice before contacting the debtor, may contact them no more than three times in seven days, and must pay out money held in trust by the 20th day of the following month. In British Columbia, Consumer Protection BC licenses collectors and says the law applies to both individuals and businesses, and collectors cannot add their own fees or interest beyond the original agreement.

Certification and insurance. The Commercial Law League of America certifies commercial agencies after a third-party audit. Its standards require a surety bond of $150,000 for agencies with up to $1 million in gross contingency fees, rising to $500,000 above $5 million, plus quarterly proof that trust account balances cover what is owed to clients. Business News Daily also recommends asking for proof of errors and omissions insurance so an overaggressive collector does not leave your company exposed.

Before you place anything: your own letters are regulated too

Many contractors try a homemade collections step first. Some versions of it create legal exposure of their own.

Do not invent a collections department. The FDCPA's definition of a debt collector includes any creditor "who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting." A letter from "Summit Recovery Services" that is really your roofing company turns you into a debt collector under federal law. Ontario is blunter: section 5 of its Act says no creditor shall deal with the debtor "except under the name in which the debt is lawfully owing or through a registered collection agency."

Some states regulate you anyway. California's Rosenthal Act defines a debt collector as anyone who regularly engages in debt collection "on behalf of that person or others," which can reach a business chasing its own consumer invoices. Florida's prohibited practices statute opens with "in collecting consumer debts, a person may not," and section 559.72 goes on to bar things like contacting a debtor's employer before judgment without written permission.

Fix the contract for next time. Under 15 U.S.C. 1692f(1), a collector may not collect any interest, fee or charge unless it is "expressly authorized by the agreement creating the debt or permitted by law." A clause making the customer responsible for collection costs and reasonable attorney fees is what lets that cost travel with the debt. One r/Contractor commenter said several of his final payments went to his attorney after three months of contractual late fees and interest, and "in the end it didn't cost me a dime," adding: "You don't have a customer non-payment problem, you have a poorly written contract problem." Pair that with collecting a deposit before starting work and there is much less left to chase.

What to hand the agency so it can actually collect

An agency is only as good as your file. For a homeowner account, Regulation F requires the validation notice to itemize the debt from a specific date, so vague records slow everything down.

Send, in one package:

1. The signed contract or accepted estimate, with the customer's full legal name and the job address.
2. Every signed change order. If the balance includes extras, the agency needs proof they were approved.
3. All invoices and a payment ledger showing deposits, progress payments, credits and the balance.
4. Completion evidence: dated photos, inspection sign-off, any walkthrough or punch list email.
5. The communication trail: reminders, the customer's replies, promises to pay and your final demand.
6. Last known contact details and any cheque copies, since banking details help if the account later goes legal.
7. Your lien status, so no one assumes the agency is protecting it.
8. A note on any complaint about the work, even if you think it is baseless. The agency will find out anyway.

Then write down the placement date and the free demand deadline, and route any payment the customer makes directly to you into an email to the agency the same day.

When a lien, a demand letter or small claims beats an agency

An agency is the middle option. It wins on undisputed, moderate balances where the customer is dodging rather than fighting. Other tools win elsewhere.

A lien wins when the deadline is open. Security against the property is stronger than a phone call, and the lien forces the issue when the homeowner refinances or sells. The trigger dates are in our lien timing guide.

A lawyer's demand letter wins on larger commercial balances. It is cheaper than a 20% to 35% cut on a five-figure invoice. On the $39,000 thread, one commenter said a letter from a lawyer citing the contract and a court deadline has a success rate "higher than one would expect."

Small claims wins when the balance fits the court and the customer can pay. Check your jurisdiction's limits and your own licensing status first; we covered both in should I take a customer to small claims court.

Nothing wins when the customer has nothing. A Quebec manufacturer on r/smallbusiness used an agency on a $7,500 bounced cheque from a company that was still operating, and it did not work. The top reply pointed to small claims, which fit that balance.

Writing it off, and the 1099 myth

Sometimes the right answer is to stop. Know what writing off actually does for you before you choose it over a 35% cut.

If your books are on the cash method, an unpaid invoice was never counted as income, so there is usually no deduction. The IRS says that to deduct a bad debt "you must have previously included the amount in your income," and that cash method taxpayers generally cannot deduct unpaid amounts. Accrual method businesses that already booked the revenue are in a different position. Ask your accountant, and in Canada, ask about CRA's rules for bad debts.

You will also see advice to threaten a nonpaying customer with a 1099. One r/smallbusiness commenter recommended sending a copy of a 1099 you will file if not paid. The form for canceled debt is Form 1099-C, and the IRS instructions list who must file it: banks, credit unions, federal agencies and organizations whose significant trade or business is lending money. A contracting business that was not paid for a job is not on that list, so skip the threat.

The decision checklist

Place the account with an agency when most of these are true:

• The customer has not disputed the work in writing, or the dispute is clearly about money rather than quality.
• The invoice is under about six months past due.
• My lien deadline has passed, I have no lien rights, or I have already filed.
• The balance is too large to write off but too small to justify a lawyer's hourly rate.
• I have the signed contract, signed change orders, a ledger, completion photos and a demand letter on file.
• I know whether this is a consumer or commercial account and what rate applies to it.
• I have read the withdrawal, direct payment, suit fee and credit reporting clauses.
• The agency is licensed or registered where the customer lives, bonded, and uses a trust account.
• I have accepted that this customer will never hire me again and may post about it.

If three or more boxes stay empty, the better move is a lien, a lawyer's letter, small claims, or a clean write-off and a better contract on the next job.

The bottom line

Should you use a collections agency for unpaid invoices? Yes, for an undisputed invoice that is still reasonably fresh, when you have the paperwork, when the lien question is settled, and when you have read the contract as closely as the rate. A homeowner account will cost more and move slower because consumer debt law applies. A commercial account will cost less but may cost you the customer.

The contractors who get the most from an agency place early, send a complete file and never pull the account at the wrong moment. The ones who get the least wait a year, place a disputed balance, and pay a withdrawal fee when the customer finally calls them directly. For the long game, the fix sits upstream: deposits, progress billing, a collection cost clause and enough steady work that no single customer can put you in this position.