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How to Start a Debt Collection Agency: Explained in 12 Simple Steps

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Published: Nov 29, 2021

During the pandemic, a lot of businesses went into debt. According to a study by Experian, the total outstanding U.S. consumer debt reached $14.88 trillion in 2020, an increase of 6% from 2019. This was the highest annual growth recorded in over a decade. Since 2010, the debt has increased by a whopping 31%. 

Such an increase in consumer debt has increased the demand for debt collection agencies. So, this is a great time to set foot in the collection business; and this post will help you do exactly that. 

Let’s see how to start a debt collection agency.

How do you start a debt collection agency?

Thanks to technology, starting a debt collection agency has become easier than before. The modern communication tools eliminate the extra time, effort, and expenses involved in traveling to client locations. The market size of the debt collection agencies industry is also expected to increase by 4.4% in 2021.

Additionally, the primary business requirements such as storing and securing data and protecting financial assets have become easier too. 

However, starting a debt collection agency requires the right planning. We have put together a step-by-step process to help you with that. 

Let’s see the steps involved in starting a debt collection agency.

1. Plan out the business

Map out the specifics of your business, or even better, build a business plan. Your business plan should primarily answer the following questions:

  • Who is your target market? 
  • What does your business model look like? 
  • How much do you need to charge your customers? 
  • What’s the minimum profit you need to stay up and running?
  • What’s the name of your business?
  • What are your responsibilities?
  • How many employees do you need, and what will they do?
  • How are you going to break down your services?
  • How will you discover high-value clients?
  • What location is the most apt for you?

Best practice: Check your state’s business records, all the trademark records, and web domain availability before you finalize your business name. It’s best to hire a lawyer to take care of this, so you don’t get in trouble for using an existing business name. Small Business Administration helps people start and set up a business.  

2. Plan out the expenses

Before preparing yourself for any external factors, it’s important to know if you can arrange for the capital needed to start a debt collection agency. Even if you’re able to obtain a license and understand the process, if you don’t have the finances sorted out, you won’t be able to start. 

Plan out the capital for the first 2-3 years, so you have enough time to break even and start making a profit. 

So, how much does it cost to start a debt collection business?

Honestly, there is no one-size-fits-all answer here. For instance, some people start alone and start hiring people gradually. Some start with a couple of partners, but with just a phone, business cards, and a laptop. Similarly, the amount of money you need to invest depends on multiple factors.

However, if you’re looking at going beyond starting a home-based collection business, here are a few things to look at while starting a debt collection agency:

  • Number of people involved
  • Office space and furniture
  • Technology adoption
  • Marketing assets
  • Transportation
  • Amenities
  • Licensing 
  • The average size of the consumer debt you’ll be chasing

3. Learn the debt collection process

Before you get into the business, acquaint yourself with the industry-standard processes. The success rate of your agency will depend on your know-how of the industry. Since debt collection is a business that revolves entirely around money, you need to take special care of the process you’ll follow. For instance, the first step is to make yourself familiar with all the laws and regulations. 

Do the necessary research to determine what laws apply to your state in addition to the Federal regulations.  

Here are a few resources to help you:

  1. The TCPA compliance guide for debt collection calls
  2. The Fair Debt Collection Practices Act 
  3. The Fair Credit Reporting Act
  4. The Gramm-Leach-Bliley Act
  5. HIPAA security rules

4. Make sure you have the right skills and traits

The most important quality any debt collector should have is knowing how to be both professional and diplomatic. You cannot come on too strong or threaten the debtors. It’s against the rules, and if you do so, the debtors may not cooperate with you. At the same time, you can’t be a pushover, or the debtor will take advantage of that. 

As an owner of a debt collection agency, you’ll have to build good relationships with your clients, for which you need people skills. 

Working with a reputable agency and becoming a debt collector before starting your own can help you gain the right skills. You’ll know and understand the process in detail, which will make it easier for you to start a debt collection agency on your own.     

5. Understand the legal requirements for opening a business

There are a set of requirements in every state when it comes to opening a business. These are unique to each state, and you must follow them. For example, some states need you to get a bond but not a license. 

Some standard legal requirements for starting a debt collection agency are:

  • Registering your business
  • Obtaining an Employer Identification Number & a Tax Identification Number
  • Getting a bond and a license, etc.

These rules change periodically, so keep yourself updated. You can hire an attorney to walk you through the legalities.

6. Obtain a bond, license, and insurance

One important thing to note here is that if you’re collecting debts from a person residing in another state, your business must also be licensed in that state. 

Now let’s see the steps to obtain a business license and a bond:

  1. Assign a registered agent for every state you’re doing business in. This agent is responsible for processing all the legal and tax documents. 
  2. Obtain a certification of authority that will include all your business information. 
  3. Obtain a collection agency bond (third-party debt collector’s bond) and then a debt collection license as per your state’s requirements.

Note that any legal procedures involved in getting a license can be quite lengthy but extremely necessary. Running a business without a permit can attract hefty penalties and legal consequences. So, check with your local and state government authorities to make sure you know all the details. 

You’ll have to dedicate around 4-6 months to get done with the formalities completely. You can also opt to outsource these to a licensing and bond service. 

Here’s a detailed guide on applying for a license and permits. You can also find local assistance here

You also need insurance to protect your business from any losses in the future. There are different types of insurance policies. The best way to choose one is by determining the risk factors. If you’re unsure, you can start with General Liability Insurance.  

7. Register for taxes

Register your business for the state and federal governmental taxes. The Employer Identification Number you obtained earlier is required for this stage. How your business will be taxed depends on your business structure: LLC, sole proprietorship, etc. 

8. Set up business accounting

Use a dedicated bank account for your business, so your personal assets stay safe if your business gets in legal trouble. This also makes tax filing and accounting easier. 

Keep a record of your income and expenses to understand your finances better. Also, this plays a vital role during the annual tax filing.

9. Purchase a physical space and other assets

You may need an office space along with the essentials we mentioned earlier in this blog. Purchase the required and make sure you have phone lines, internet access, etc., to run the operations smoothly. 

This doesn’t have to be a luxurious space. Most businesses start small. You can start with only the essential assets such as a chair and table, a computer or laptop, etc. 

10. Apply for financing if necessary

Not having sufficient funds is one of the reasons businesses fail to perform well. Apply for financing in a local bank to help you get through the first few months if needed. 

11. Find a mentor

Having a business mentor can help you make better decisions in business. Seek an experienced professional who has a good amount of experience in the debt collection industry. This mentor can also help you with your business plan and all other aspects. 

12. Get started with marketing

Start by branding your business. A unique identity will help you stand apart from your competitors from the beginning. Network digitally, at events, etc., and collect your target audience’s contact information while pitching your business. 

Here are a few marketing assets to get started with:

  • Logo
  • Website
  • Brochures
  • Signages
  • Business cards
  • Letterheads

Create social media profiles on the platforms your audience hangs out the most. Write letters and send them to local businesses which may need your services. If you have some contacts through your networking efforts, call them up or start by texting and pitching your services if they haven’t converted already.   

Get started!

Starting a successful debt collection agency depends on many factors, including the ones we have discussed in this article. As you expand your client base and successfully collect debts, you can take on bigger clients and thereby larger profits. 

Featured image: Photo by Karolina Grabowska from Pexels

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