Financial, Legal, Insurance & Management ServicesWhat's the Difference Between Third-Party and In-House Debt Collectors?

Businesses that are owed money can employ in-house or third-party debt collectors - but what's the right choice for you?


Knowing when to send business debt collection into collections is often easier than knowing which collection agency is up to the challenge of collecting the debt. There are a number of ways a business can collect its debt from another company. Let’s look at the difference between in-house debt collectors and third party debt collection agencies. 

In-House Debt Collectors 

In-house debt collectors are directly associated with the business attempting to collect the debt. For instance, a company may have a business debt collection department that handles all the outstanding debts from other companies. Another example is a business owner who personally handles all business debt collection activities. That’s why in-house debt collectors are often referred to as first party debt collectors. Having a collections department as part of its infrastructure can have its advantages. For instance, the department can act faster on accounts with bad debts. 

However, in-house debt collection does have a major downside. For instance, the businesses have a working relationship with each other. This can often strain the relationship when one party wants its money and another party wants to continue to delay payment. 

Also, setting up a separate collections department is a lot of work. It requires a great amount of capital to be effective, as well as a lot of infrastructure. For instance, a company may have to employ a number of agents to handle a business debt collection and make sure they are properly trained. Second, it has to define a debt collection policy for when bills reach the debt collection stage. Even if the business owner foregoes hiring people and does the work herself, the process for debt collection is still the same. Once the accounts become overdue, an in-house debt collector typically: 

  • Sends statements regularly
  • Sends letters about defaulting on overdue accounts (such as lawsuits)
  • Frequently contacts businesses about their overdue accounts
  • Keeps timely and accurate records about all payments and contacts with businesses
  • Follows the debt collection laws in the company’s state along with federal debt collection laws
  • Decides when it’s no longer effective to pursue the delinquent accounts (spending more money and time than the business would receive, if the account became current)
  • Considers further options: using a third party debt collector or suing the business (see our infographic "Should You Sue Your Customer?" for more information)

Therefore, many companies find that it is more cost effective and less expensive to forego creating an in-house debt collection department. 

Third-Party Debt Collectors 

A third-party debt collector is not directly involved in issuing credit or have any connection to the debtor or businesses with overdue accounts. Its sole business is getting companies to pay their debts. Since there is no prior connection with either party, a third party may have an easier time collecting the debt. 

Third-party debt collectors are paid by businesses looking to collect the debt. The method and rate each third-party debt collector uses varies by agency. For example, the rate a third-party collector may start off low, say 10 percent. This collector may pay a commission or percentage on the debts they recover. However, it won’t charge if it doesn’t recover the debt. The latter is often an incentive for the agency to successfully obtain business debt collection. 

It’s important to note that a third-party debt collector is different from a bad-debt purchaser. The third-party collector doesn’t own the debts. Instead, it works on the company’s behalf to collect the debt. For example, a third-party debt collector may:

  • Send a series of business debt collection letters (a creditor may pay a flat fee for the letters)
  • Call the business debtor
  • Work out any payment plan with debtors

Regardless of the tactics use to recover the debt, the original creditor — the business who wants its money — doesn’t have to worry. All the debt collection activities are done by another party which won’t potentially ruin any existing business relationship. The business also doesn’t have to worry about creating a debt collection department or hiring additional employees. Thus, the basic difference is it’s a third-party debt collector’s job to recover debts. It has no association with the businesses involved.


Profilepic09349834089bwBusiness Development Manager Dan BarnettThe Kaplan GroupBusiness Development Manager


Laura JohnsonLaura JohnsonFrom the debtor's perspective

Great article, Dan. From the business aspect, employing the use of a third party to handle their debt collection from clients can be risky. You stated "All the debt collection activities are done by another party which won’t potentially ruin any existing business relationship." That's a pretty bold statement, as the originial business that the debt is owed to has little control over the tactics used by the third party debt collector. If they become overly agressive or threatening to the debtor, that will most certainly reflect on the debtor's relationship with the business.

Clients and consumers who owe a debt to a business have rights as well and the rules are becoming increasingly stricter on the third party debt collection agencies. While in-house debt collection methods are not included under the Fair Debt Collection Practices Act (FDCPA), third party creditors are and consumers can sue these entities for harassment if certain tactics are seen as overly agressive or threatening. You can read more about the difference between in-house and third party debt collection under the FDCPA here:

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