Any business owner or manager who has ever made a collections call has done first party collections, whether they realize it or not. First party collections means collecting on your own accounts, so any request for payment by phone, letter or in person qualifies as first party collections.

“First party” literally means that you were the first party in the original exchange of goods or services for money, i.e. the lender. The person who accepted the goods or services and promised to pay, i.e. the debtor, is the “second party.” If an outside collection agency becomes involved, they were not part of the original transaction, which is why they’re called “third party.”

First party collections are most common early in the debt collection cycle. As soon as your regular accounts receivable staff become aware that a bill is past due, they can pass it on to first party collections without a time lag. First party collections people are often more cognizant of the need to attempt to keep on good terms with the debtor in order to get more potential business in the future.

Third party collections agencies are sometimes seen as hostile, while if your clients need your product or service to keep his or her business running smoothly, they will strive to stay on your good side. Sometimes just hearing a familiar voice asking nicely for payment is enough to solve the problem.

In addition, first party collections are not governed by the Fair Debt Collection act, believe it or not. This is because under the law the first party or its subsidiary is considered the lender rather than a collector and it means you can do some things that a third party debt collector can’t by law. There are still state and federal laws that apply, though, so make sure you are familiar with all applicable regulations if you go this route.

Most companies handle their own collections for a period of ninety days to six months. Ideally, when the 2-3 month mark comes up and collections efforts aren’t working, it’s common practice for companies to turn over these accounts to a third party agency or “sell” the debt to them, which means the agency pays for the right to keep whatever return they get on the debt.

First party collections are best handled by people or a staff dedicated entirely to collections. Having other members of the staff like your sales force or accounting department is not a good idea. They won’t have the skills, time or motivation to successfully pursue collections as well as collections professionals will.

First party collections done by a dedicated staff is just a more efficient way of handling it. They can take continuing education on collections techniques and perform more collections tasks such as finding people using private investigation, working out creative payment arrangements or disguising collections as audits. First party collections that are operated like third party collections agencies are the most successful.