How To Start A Collection Agency

Debt collection agencies play a significant role in ensuring the stability of the U.S. economy. Thanks in part to the services they render, lenders are more inclined to extending consumer credit, as these agencies act as a type of guarantee that debt collection is possible. More so, debt collection helps to ensure lower consumer prices. With better credit access and lower prices, consumers are also able to actively participate in the economy.

But starting a collection agency comes along with lots of obligations. There are many laws and regulations that debt collection agencies need to comply with while providing their services. These regulations are especially important as they help ensure the protection of consumers’ rights. However, starting a collection agency and getting a license can be quite profitable and you can choose to work from home or an office as well as determine the amount of work you want to manage.

Starting your own collection agency is a great idea if you are a people’s person, one who likes communicating, or you are looking to develop your soft skills. These skills would be important as you will have to deal with individuals who owe and are not willing to pay up. Some people may be hostile, frightened, or even unwilling to talk to you. But setting up the business the right way pays off in many ways. So what does it really take to start a debt collection agency?

• Learn About Your State’s Legal Requirements for Business

Every state has its set of legal requirements that potential collection agencies must comply with. While some states may only require the registration of the business with the state, other states may require that you obtain a license and pass an examination. It is important to you know and comply with all the requirements of your state so you can save yourself time and money. Some common state requirements include business registration, application for business license, tax ID number, insurance and a surety bond.

• Equipment and Payment Processing

In order to launch your collection agency successfully, you need a proper funding plan for at least the first two or three months. Expenses here include the funding you will need to purchase basic equipment such as office supplies, a telephone, toll-free line, a computer, and more. Expenses also include the money needed to obtain an initial debt portfolio to collect and costs associated with registering the business, getting a license, and getting it bonded. While equipment related costs are about the same for every debt collection agency, the cost of licensing and debt account portfolios vary greatly.

Payment processing is another consideration for your collection agency. Your ability to collect payments is key to your success. Credit card processing for collection agencies have become a struggle for startup collections agencies and for many, practically impossible to procure a collection agency merchant account. You will need to work with a specialist in collection agency merchant accounts, if you can pull it off as a startup. Another payment method to consider would be ach processing. This method would allow you to electronically debit payments from a checking account. Lastly, the old fashion method of requesting a check or money order, may be your last alternative to get started.

• Learn About The Laws That Govern Debt Collection

There are certain federal laws that debt collection business owners need to familiarize and comply with while providing their services. These laws include The Fair Debt Collection Practices Act (FDCPA), The Fair Credit Reporting Act (FCRA), The Telephone Consumer Protection Act (TCPA), The Gramm-Leach-Bliley Act (GLBA), and The Health Insurance Portability and Accountability Act (HIPAA). The FDCPA is the primary law that determines the ideal ways collection agencies can collect debt. It also defines the rights of consumers, and what actions may be taken if they are harassed by a collector.

In addition to all of these, most states also have their debt collection laws that help to better define the obligations and responsibilities of collectors, as well as the conditions under which they allowed to collect debt in the state. Familiarizing yourself with the state and federal laws is key if you want your business to succeed.

• Business License

While most states require some form of licensing before an agency can collect debts, not all states have such laws. And even if this is not a requirement in your state, a business license may still be required if you collect debt in other states. Though the licensing requirements for a collection agency per state can be unique, you will generally need to complete a license application form, provide a proof of minimum net worth or financial statement, pass an exam, pay application and licensing fees, obtain a collection agency bond and insurance policies, and pass a criminal background check.

• Collection Agency Bond

The collection agency bond is a major requirement for licensing in many states. This bonds acts as a financial guarantee for the agency’s clients and the state. Though the bond conditions and cost involved vary to a certain extent from state to state, there are many similar conditions shared by collection agency bonds. Some common conditions are:

• Bonded agencies must comply with the state laws governing their business.
• Bonded agencies must comply with the terms of agreement with their clients.
• Agencies must report and pay up any collections made on behalf of their clients within a certain period of time.
• The collection agency bond is beneficial for anyone who is harmed as a result of the violation of state laws by a debt collection agency.

What is Your Target Market?

Your target market as a collector includes any business that sells to individuals or other businesses by extending credit. If the company’s credit department is overextended or does not possess the skills required to collect challenging debt, a collection agency will get a call.

How to Market Your Debt Collection Agency

Your persuasiveness will be your most effective tool as this will be crucial in ensuring your agency can collect payment from debtors. Pitching your business at networking events or over the phone will often be your best bet as you strive to promote your business.

Closing Thoughts

Starting a collection agency can be cumbersome and overwhelming in the beginning, but with focus and perseverance you can prevail. Once operational, the industry can be very lucrative for the principals. If you can navigate industry regulation and attract the right clients, the shy is the limit. Stay focused and success will follow.