"First party collections" refers to a company using its own employees, usually within the accounts receivable department, to collect on unpaid invoices. "Third party collections" are collections efforts made by a collections agency, outside of the original crediting company.
When an invoice remains unpaid past the due date, the original creditor or "first party" (to whom payment is due) has the right to pursue the account holder to fulfill their obligation to pay. If, after a certain period of time, the original creditor requires assistance with the collections process, they may opt to use a third party collections agency.
First Party Collections Explained
Every accounts receivable department may have its own way of managing delinquent accounts and unpaid invoices. Depending on the size and structure of your company, you may choose to make a few phone calls and eventually write off the account as bad debt. Larger organizations may have their own in-house collections group within accounts receivable. The in-house or first party collections team will attempt to collect before a specified period of time, such as year end, before writing it off as bad debt.
Benefits of first party collections to the original creditor are:
- Retaining 100% of what is collected
- Control of tone of client correspondence
- Maintenance or restoration of client relationship
Third Party Collections Explained
If an account has been charged off or written off as bad debt, it has been deemed uncollectible by the original creditor. The creditor will assign the account to a third party agency on a contingency-fee basis. Fees vary, depending on the agency and the agreement with the creditor.
Benefits of third party collections to the original creditor are:
- No fees are required unless the agency is able to collect
- The ability to focus on other tasks while the debt is being collected
- The use of collections technologies that may not be available to the original creditor
- Expertise and efficiency of professional collections representatives
- Improved chance of recovery of debt that was deemed uncollectible
Third party collections agencies that focus solely on commercial or B2B collections will also work with the original creditor to maintain a positive relationship with the client.