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Recovery Rate vs. Commission Rate in Debt Collections

Posted by Emily Herrington on Nov 30, 2020 11:32:00 AM

According to Investopedia.com, recovery rate is defined as the extent to which principal and accrued interest on defaulted debt can be recovered, expressed as a percentage of face value.

In collections, recovery rate is based around this same calculation, but it shifts to the focus of the agencies effectiveness in collecting debts. For instance, if a hospital sends an agency $100,000 in collection accounts each month, and the agency collects $50,000 of that debt, the agency has a 50% recovery rate for that month. This same calculation is used to determine the annual recovery rate of that agency across all accounts from all its clients. This can be expressed as recovery rate in one particular industry, or across all industries showing their success as a whole.

Why is recovery rate more important than commission rate?

Not all collection agencies are created equal. Some agencies charge an initiation fee, or retainer fee, while others may charge a monthly fee plus commission fees while in a contract with a client. But, the vast majority of collection agencies are contingency-only. In a nutshell, the agency doesn’t get paid unless you do. This is the most attractive type of relationship with an agency because it lowers the perceived risk of the client.

Of these contingency-only agencies, clients look at commission rates. It’s only natural to price shop many different agencies, but what clients so often fail to recognize is that recovery rate is so much more valuable than the cost of commissions. Why? Because if the agency charging you a lower commission fee also has a low recovery rate, you are recovering significantly less money. We can illustrate this very easily.

Agency A receives $1,000,000 per month from a hospital and they only charge 20% commission, but they have a recovery rate of 11.1. Annually, the hospital will receive back $1,065,600 of its old debt.

Agency B also receives $1,000,000 per month from a hospital and they also charge 20% commissions, but they have a recovery rate of 12.1. This agency delivers to the hospital a total of $1,161,600 back from old debt for that year.

Now, let us look closely at Agency C. This agency receives the same amount, $1,000,000 per month, but Agency C charges 22% commission. However, their recovery rate is 13.87, yielding the hospital $1,298,232 annually.

So, it goes without saying, you get what you pay for. Who do you want working for you?

Interested in learning about contingency-only collections with ART? Give us a call today! 423-586-7613.

Topics: Insider, Collection Strategy, debt collections, collection agency, accounts receivable, commission rate, revenue, recovery rate