The debt collection industry in the United States is a huge economic force: every year, agencies collect about $50 billion in total, from which they earn over $10 in commission and fees. The success rate of collection agencies can depend significantly on having know how—from education and professional experience in the industry. [2] X Research source
Having practical experience with credit and collections is a must to run a successful debt collection agency. You may need to get further education in finance, credit, debt collection as well as some practical experience before you can start. This can help your business be more successful.
Are you able to handle the physical demands? Having a collection agency might require you to sit or stand on your feet for long periods of time. You may also need to lift heavy office equipment on occasion. You should be willing to spend at least 10-12 per day and six days a week to develop your business. Are you able to handle the emotional demands? Having to demand payment from another business’s clients can be draining. You may have to ask people with no money or serious medical conditions to pay, or you may have to deal with belligerent people. Think about if being a debt collector fits your personality. Client management is a significant part of the job and if you don’t like working with people, this may not be the right choice for you. Are you able to meet state and federal requirements to be a debt collector? Most states have specific laws on bonding, licensing and trust account requirements for debt collectors.
Remember that you will have to pay taxes and other fees for your business and that annual overhead such as bonding and insurance, payroll, and office supplies.
You’ll need to know about laws such as the Fair Debt Collection Practices Act,[3] X Trustworthy Source Federal Trade Commission Independent U. S. government agency focused on consumer protection Go to source The Fair Credit Reporting Act,[4] X Research source the Health Insurance Portability and Accountability Act,[5] X Research source and the Gramm-Leach-Bliley Act. [6] X Trustworthy Source Federal Trade Commission Independent U. S. government agency focused on consumer protection Go to source You’ll also need to know about bankruptcy laws. You may want to consult an attorney on what laws and regulations you need to know to start a debt collection agency. Consider getting additional education on debt collection from professional associations or at a local university to help you understand regulations and running a business.
Be as detailed in your plan as possible, considering every aspect of being a collection agency. List owner and any employees’ responsibilities. Create a working list of services and fees that you can tailor to demand. Finally, make sure to calculate any costs you may have to take on for supplies and payroll.
For example, you’ll need to include information on how you will set up new accounts and monitor activity on current accounts, such as with a computer system that displays information when you call or write a debtor. You should have a client accounting module that can give you information on accounts referred to you by each creditor and the success in recovering accounts. This can help you see what clients are actually generating profit for your agency. You will also need information on how you’re going to store sensitive financial, personal, and in some cases health, data.
If you have any questions, consult the Small Business Administration, which was set up to help smaller companies. [7] X Trustworthy Source U. S. Small Business Administration U. S. government agency focused on supporting small businesses Go to source You can also consult the Association for Credit and Collection Professionals at www. acainternational. org. Make sure to register your business with the Internal Revenue Service (IRS) or other tax authorities. You may want to hire a local accountant to help you navigate the financial side of your business, from registering with the IRS to budgeting.
There are specific laws in the United States and in specific states under which your collection agency will be subject. Regulations vary from state to state. Most states have laws that require debt collectors to have specific licensing and bonding before they can begin business. In addition, most have trust account requirements. Not having the proper licenses, bonding, or trust accountability can open you and your business up to considerable liability. The Small Business Administration can help if you have any questions. [8] X Trustworthy Source U. S. Small Business Administration U. S. government agency focused on supporting small businesses Go to source You can also consult the Association for Credit and Collection Professionals. Make sure to get insurance that will cover your assets and general liability.
It’s important to have a well-developed business plan to show potential financiers or clients. In addition, having the proper legal entity and licenses can help legitimate you and your business to banks. You’ll want to consider the average collection industry recovery rate of 19. 4%. This will help you estimate profit to gross revenue, which you’ll need while applying for financing.
This person can offer invaluable advice on everything from fee structuring to dealing with difficult clients or continuing your education as a debt collector.
If you want a space outside of your home but don’t want an entire office, consider renting a cubicle in a larger retail space. Make sure the space is quiet so that you can conduct business in a professional manner and hear clients when you speak to them.
You’ll need designated toll-free phone lines on which clients can easily return your calls. You’ll need to purchase a high-quality computer, plenty of paper for letters, and may want to consider purchasing mail supplies to send out collection notices. Consider purchasing collection-specific hardware and software. You’ll also need high-speed Internet services. Technology can help you more effectively collect debts and retain customers.
Make sure your letters comply with federal and state laws. You must inform clients that they have at least 30 days to respond to your letter or dispute the debt. Include information such as to whom the debt is owed, how a debtor can contact you, and any fees for your services. Review collection letters monthly to ensure they comply with state and federal regulations.
If you decide to buy bad debt outright, you will make money based on what you paid for the debt versus how much you recover from the debtor. You may want to set base rates and tailor them according to each client. Be aware the large collection agencies may offer the same services for a lower fee or commission, so consider if and how you want to compete with them. Make sure your fees are commensurate with your experience and success rate.
Make sure to have a separate bank account for your business than you do for personal finances. [9] X Research source Likewise, have separate credit lines for your business than you do for yourself. [10] X Research source Make sure every aspect of your fees is transparent to clients. Maintaining fair collection practices is vital to your success.
You’ll need business cards, letterhead, and may want to consider flyers or brochures. Research other collection agencies to see how they attract customers. You want your brand to be simple, distinctive, and attractive to potential customers. Consider businesses with which you would like to work. Do you want to specialize in medical debts or credit card debts? This may help you identify potential customers and how best to attract them. Small businesses rely heavily on word-of-mouth advertising. Build clientele through referrals and maintaining strong business relationships with your clients.
You’ll need to present potential clients with your business plan, your resume, and any other information they may need or want to know. Consider writing professional letters to local businesses to help attract clients. Set up meeting with local businesses to discuss the possibility of working together.
If you decide to hire employees, you’ll need to interview the person and make sure they are professional, experienced with credit or debt collection, and can help you grow your business. Any employees may likely need licenses, certificates, and bonding to work as a debt collector. They may also need education on debt collection laws.
Read trade publications, attend continuing education, and network with other collection and credit professionals to help you stay current in your skills, services, and trends.
