What is a collections agency?

A collections agency is an outside firm that a business hires to collect money from customers who have stopped paying. Agencies typically take over an account after the creditor has tried and failed to recover it in-house, and they usually work on either a contingency basis, where they take a percentage of whatever they recover, or a flat-fee basis for specific actions like sending demand letters.

Traditional agencies often charge recovery rates between 25% and 50% of the amount collected, with higher rates for older or harder debt. That cost is the tradeoff for accepting work that the creditor has already struggled with. Agencies usually take over only after an invoice is well past due, often 90 days or more, by which point recovery is mechanically harder.

A modern alternative to the late-stage agency model is early, automated outreach that catches invoices in the first week or two past due, before the likelihood of full payment drops. That keeps the relationship with the customer intact and avoids handing the account to a third party at all. Many businesses end up using both: automation for the early window, an agency only for the small percentage that genuinely need formal collections.