Guide
A worked example showing what a collections agency actually returns after commission and recovery odds, compared against a demand letter, a final phone call, and just writing it off.
An unpaid invoice sitting past 90 days feels like unfinished business. You did the work, you're owed the money, and handing it to a stranger for a cut of the recovery feels like losing twice. But the decision isn't emotional, it's arithmetic. Once you run the numbers, most invoices under a few thousand dollars don't clear the bar for collections at all.
Commercial collections agencies typically work on contingency, meaning they only get paid if they collect. Standard rates run from 25% to 50% of whatever they recover, and the rate depends on:
For a straightforward domestic account under 90 days old, expect somewhere around 25% commission. Past six months, or for anything under about $1,000, agencies often push toward 40-50% because the file takes as much work to chase as a larger one.
Commission only matters on money that actually comes in. Recovery on accounts placed at 90+ days is commonly cited in the 20-30% range across the industry. That means for every ten invoices an agency takes on at that age, roughly two or three get paid in full or part, and the rest go nowhere despite the chase.
Multiply the two factors together and you get the real expected return, not the invoice face value.
Say you're owed $3,000 for a completed job, the client has gone quiet for 90 days, and you place it with an agency at a 25% commission rate. Industry recovery on a fresh 90-day placement sits around 25%.
| Step | Calculation | Result |
|---|---|---|
| Invoice value | - | $3,000 |
| Probability of any recovery | 25% | Expected collected: $750 |
| Agency commission | 25% of collected | -$187.50 |
| Expected net to you | $750 - $187.50 | ≈ $560 |
So the expected value of placing that invoice is roughly $560, before you've spent a single extra hour on it yourself, answering the agency's follow-up emails, or supplying paperwork they ask for. That's not nothing, but it's a long way from $3,000, and it's a probability-weighted number, not a guarantee. Most months you'll get either the full amount, a partial payment, or nothing.
A formal demand letter, either from a solicitor or a template service, typically costs $75 to $150 and is a one-off fee regardless of outcome. It doesn't carry the same enforcement weight as a collections agency, but it does two useful things: it signals you're serious, and it creates a paper trail if you later go to small claims.
Run the same expected-value logic. If a demand letter has, say, a 30-40% chance of shaking loose payment on a stubborn but not hostile client, the expected return on a $3,000 invoice is $900-$1,200, minus the $75-$150 fee. That beats the collections agency's expected $560 in many cases, because you keep 100% of whatever comes in rather than handing over a quarter to a third. The trade-off is your own time chasing it up if the letter doesn't land.
Before paying anyone, one direct phone call costs you nothing but time and can outperform both options. A calm, specific call ("I'm following up on invoice #1042 for $3,000, due 1 March, can you tell me when I can expect payment?") resolves a surprising share of stale invoices, especially where the delay is disorganisation rather than dispute or inability to pay.
The catch is your time isn't free. If your effective hourly rate is $65 (check yours with the hourly rate calculator), and chasing this account eats three hours across calls, emails and admin, that's $195 of your time against a possible $3,000 recovery. Still a good bet if the call has a reasonable chance of working. A bad bet only if you're chasing the same client for the fourth time with no result.
Writing off the debt means claiming it as a bad debt (talk to your accountant about how that's treated for tax purposes) and moving on. This is the right call when:
The real cost of writing off isn't just the invoice amount, it's the margin on that job. Check your job profitability calculator to see what that job actually earned you once materials and labour are counted. A written-off $3,000 invoice on a job that only cleared $400 profit stings less in relative terms than it feels like on the surface.
Every hour spent chasing a low-probability debt is an hour not spent quoting new work. If your quote-to-close rate and average job value mean an hour of prospecting or quoting reliably generates more expected revenue than an hour chasing a cold account, that's your answer without needing the collections maths at all.
Timing matters more than most owner-operators realise. Recovery rates on invoices roughly halve once they pass the six-month mark, because trails go cold, businesses close, and debtors have simply moved their attention elsewhere. An invoice with a 25% recovery chance at 90 days might sit closer to 10-12% at 180 days.
That means the decision point isn't "should I ever send this to collections", it's "am I past day 90 without payment, with no dispute and no payment plan in progress." If yes, place it now or write it off now. Sitting on it for another three months while you decide is the worst option on the table, because it quietly shrinks the value of every choice above.
| Situation | Likely best move |
|---|---|
| Invoice under $800, 90+ days, no response | Write off, reallocate time |
| $1,000-$5,000, 90 days, client contactable | Demand letter first, collections if ignored |
| Over $5,000, 90-120 days, going cold | Place with agency now |
| Any amount, 180+ days, unresponsive | Write off unless legal action is already planned |
None of this replaces getting paid up front or on milestones in the first place. But when a debt is already stale, the fastest route to clarity is running the numbers, not chasing your feelings about being owed money.
The Small Business Operations Kit ($19) turns guides like this one into fill-in-once worksheets: rate card, quoting sheet, job costing, payment terms and follow-up templates.