Many small business owners have heard of the Fair Debt Collection Practices Act (FDCPA), and assume it will cover them in the even a past due invoice needs to be sent to collections. This is not the case. There is less oversight for business debt collection than you may think!
Though Congress enacted the Fair Debt Collection Practices Act in 1977 and added it to the Consumer Credit Protection Act in 1978, it actually defines “consumers” and “debt” as specifically referring to personal, family or household transactions. This means that debts owed by businesses or by individuals for business purposes (commercial debts) are not subject to the FDCPA. In fact, there are no federal laws, that regulate third-party commercial (business-to-business) debt collection or provide guidelines for the conduct of commercial debt collectors.
So, if the FDCPA does not apply to business debt collection by third parties, how are those collection agencies regulated?
The first and most sound line of defense for business debt collection is your state’s laws. In some U.S. states, commercial collection firms must be licensed in order to do business in those states. For the protection of creditors, most of these states also require that the firms be bonded. In some states, licensing is required to collect for creditors of that state; in others, to collect against debtors located in the state. Contact your local business bureau for insight on the laws of your state. In all instances of licensing, some form of renewal is required, and should be checked for any collection agency you’re considering. Small business owners should be warned, very few collection agencies are licensed in 50 fifty states.
The next line of defense would primarily be the Commercial Law League of America and its Commercial Collection Agency Association. They have generally assumed responsibility for looking after the needs and rights of creditors and their customers/debtors when it comes to business debt collection needs and practices. However, they have no real legal jurisdiction or legal standing (can’t do much but revoke membership).
This is why it’s of utmost importance to ensure your business does the appropriate due diligence when selecting a collections agency (or avoid needing collection agencies by using an AR management platform).
Protect Your Business
Small businesses must be very wary of their local reputation, it’s the lifeblood of their business. Working with a collection agency who collects unethically or who harasses your debtors can seriously damage your own business’ reputation around town.
First and foremost we recommend avoiding the need for a collections agency all together by diligently managing your receivables. If you feel a debt must go to collections, we strongly recommend only working with members of the Commercial Collection Agency Association (who are therefore also certified by the Commercial Law League of America) and ensuring the collection agency is licensed in your state.