Start a debt collection agency by following these 10 steps:
You have found the perfect business idea, and now you are ready to take the next step. There is more to starting a business than just registering it with the state. We have put together this simple guide to starting your debt collection agency. These steps will ensure that your new business is well planned out, registered properly and legally compliant.
Check out our How to Start a Business page.
STEP 1: Plan your business
A clear plan is essential for success as an entrepreneur. It will help you map out the specifics of your business and discover some unknowns. A few important topics to consider are:
- What are the startup and ongoing costs?
- Who is your target market?
- How much can you charge customers?
- What will you name your business?
Luckily we have done a lot of this research for you.
What are the costs involved in opening a debt collection agency?
The good news is that there’s very little upfront cost. This is the sort of business that can be started from your home with basically only a phone, business cards, and a computer. But let’s take a closer look at materials you may need if your business expands beyond a home-based operation:
- Office rent -- Zero to $500 a month in many locations. Your clients and debtors won’t often, if ever, visit you in your office, so you don’t have to impress. All you need is space big enough for a desk and a computer. If you have a spare bedroom or a kitchen table at home it’s enough to get you started, though you will likely want to upgrade to a more professional environment once you can afford it.
- Office equipment -- $1,500 max. This is for a desk and chair, a computer, and a phone.
- Transportation -- $200 at most. Most of your business will be conducted by phone, but you might use a car to meet with debtors face to face, to pitch business to a client or to attend a networking event.
- Logo, website and marketing tools -- $200 or more. Hire a graphic design to design a logo for your business cards and letterhead and the appearance of your website. Your digital presence can be minimal, but make sure clients can figure out how to contact you.
- Legal, licensure and insurance -- A few thousand dollars. You do have to be licensed and bonded in most states, but the specifics vary greatly. Start by consulting this online guide to licensing requirements by state. And then meet with an attorney before you start, to make sure your agency is in good legal standing.
- Association membership fees -- A few hundred dollars a year. Consider joining such industry associations as the Association of Credit and Collection Professionals, the National Association of Credit Management or the American Recovery Association. Also consider joining the chamber of commerce in your community or other business associations where you might meet clients.
What are the ongoing expenses for a debt collection agency?
Phone, Internet and transportation are generally your main ongoing obligations. You’ll also need to make enough or have enough in savings to meet your day-to-day financial demands until your business is able to break even.
Who is the target market?
Any business that sells to other businesses or individuals by extending credit will have its share of non collectable debt. The company’s own credit department might be overextended or not adept at collecting challenging debt, and that’s when a collection agency like yours gets the call.
How does a debt collection agency make money?
You’ll charge your business customers a commission as a percentage of the financial amount you’re able to collect. This will be a smaller percentage for newer and easier to collect debts and a higher amount for old or particularly challenging debts or those that have unsuccessfully been worked by multiple collection agencies in the past.
How much can you charge customers?
You’ll negotiate the percentage of the debt you collect, based on the degree of difficulty. Keep in mind, you’ll get nothing unless you collect, so you must negotiate a high percentage (even as much as 50-70 percent of the total) when collection is in doubt because of the age of the transaction, the absence of valid contact information or the failure of other agencies before you. Debt that is fresher, on the other hand, might make you a commission as low as 18 percent of the total amount for the relatively small degree of risk. Your bottom line success will be in charging a commission that’s as high as you can get without making your seek a better deal with competitors.
Some collection agencies charge by a monthly fee, but that’s difficult to get clients to agree to since there’s no guarantee of collection.
How much profit can a debt collection agency make?
That’s highly variable. According to the U.S. Bureau of Labor Statistics, the median pay for debt collectors was about $17.00 an hour, but that was for a single individual -- not someone who owns a business and could employ several collectors.
How can you make your business more profitable?
Consider expanding into other areas where you can use your talent for finding and contacting individuals, such as by offering private detective services or skip tracing for bail bondsmen.
What will you name your business?
Choosing the right name is important and challenging. If you don’t already have a name in mind, visit our How to Name a Business guide or get help brainstorming a name with our Debt Collection Agency Name Generator
When registering a business name, we recommend researching your business name by checking:
- Your state's business records
- Federal and state trademark records
- Social media platforms
- Web domain availability.
It's very important to secure your domain name before someone else does.
STEP 2: Form a legal entity
Establishing a legal business entity such as an LLC or corporation protects you from being held personally liable if your debt collection agency is sued.
Form Your LLC
Read our Guide to Form Your Own LLC
Recommended: You will need to elect a registered agent for your LLC. LLC formation packages usually include a free year of registered agent services. You can choose to hire a registered agent or act as your own.
STEP 3: Register for taxes
You will need to register for a variety of state and federal taxes before you can open for business.
In order to register for taxes you will need to apply for an EIN. It's really easy and free!
You can acquire your EIN for free through the IRS website, via fax, or by mail. If you would like to learn more about EINs and how they can benefit your LLC, read our article, What is an EIN?.
Small Business Taxes
Depending on which business structure you choose, you might have different options for how your business will be taxed. For example, some LLCs could benefit from being taxed as an S corporation (S corp).
You can learn more about small business taxes in these guides:
There are specific state taxes that might apply to your business. Learn more about state sales tax and franchise taxes in our state sales tax guides.
STEP 4: Open a business bank account & credit card
Using dedicated business banking and credit accounts is essential for personal asset protection.
When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your business is sued. In business law, this is referred to as piercing your corporate veil.
Additionally, learning how to build business credit can help you get credit cards and other financing in your business's name (instead of yours), better interest rates, higher lines of credit, and more.
Open a business bank account
- This separates your personal assets from your company's assets, which is necessary for personal asset protection.
- It also makes accounting and tax filing easier.
Recommended: Read our Best Banks for Small Business review to find the best national bank, credit union, business-loan friendly banks, one with many brick-and-mortar locations, and more.
Open net-30 accounts
When it comes to establishing your business credit, net-30 vendors are considered the way to go. The term "net-30," which is popular among vendors, refers to a business credit arrangement where the company pays the vendor within 30 days of receiving goods or services.
Net-30 credit terms are often used for businesses that need to obtain inventory quickly but do not have the cash on hand.
Besides establishing business relationships with vendors, net-30 credit accounts get reported to the major business credit bureaus (Dun & Bradstreet, Experian Business, and Equifax Business Credit). This is how businesses build business credit so they can qualify for credit cards and other lines of credit.
Recommended: Read our guide on the best net-30 vendors so you can start building business credit now, so you never have to worry about cash flow in the future. Keep in mind that poor cash flow is the #1 reason businesses fail!
Get a business credit card
- This helps you separate personal and business expenses by putting your business' expenses all in one place.
- It also builds your company's credit history, which can be useful to raise money and investment later on.
STEP 5: Set up business accounting
Recording your various expenses and sources of income is critical to understanding the financial performance of your business. Keeping accurate and detailed accounts also greatly simplifies your annual tax filing.
STEP 6: Obtain necessary permits and licenses
Failure to acquire necessary permits and licenses can result in hefty fines, or even cause your business to be shut down.
State & Local Business Licensing Requirements
Certain state permits and licenses may be needed to operate a debt collection agency. Learn more about licensing requirements in your state by visiting SBA’s reference to state licenses and permits.
Most businesses are required to collect sales tax on the goods or services they provide. To learn more about how sales tax will affect your business, read our article, Sales Tax for Small Businesses.
For information about local licenses and permits:
- Check with your town, city or county clerk’s office
- Get assistance from one of the local associations listed in US Small Business Associations directory of local business resources.
STEP 7: Get business insurance
Just as with licenses and permits, your business needs insurance in order to operate safely and lawfully. Business Insurance protects your company’s financial wellbeing in the event of a covered loss.
There are several types of insurance policies created for different types of businesses with different risks. If you’re unsure of the types of risks that your business may face, begin with General Liability Insurance. This is the most common coverage that small businesses need, so it’s a great place to start for your business.
Learn more about General Liability Insurance.
Another notable insurance policy that many businesses need is Workers’ Compensation Insurance. If your business will have employees, it’s a good chance that your state will require you to carry Workers' Compensation Coverage.
STEP 8: Define your brand
Your brand is what your company stands for, as well as how your business is perceived by the public. A strong brand will help your business stand out from competitors.
If you aren't feeling confident about designing your small business logo, then check out our Design Guides for Beginners, we'll give you helpful tips and advice for creating the best unique logo for your business.
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How to promote & market a debt collection agency
Your most effective tool will be your persuasiveness -- the same tool you’ll use to gain payment from debtors. Pitching business on the phone or face to face at networking events will often be your best means of promoting your business.
How to keep customers coming back
Once you’ve made customer contact and persuaded them to let you attempt to close a debt, your success in that area will bring in more business. Companies can quickly assume that debt is dead, so it can seem like found money if they get back 70 percent of what they were never expecting to see in the first place.
STEP 9: Create your business website
After defining your brand and creating your logo the next step is to create a website for your business.
While creating a website is an essential step, some may fear that it’s out of their reach because they don’t have any website-building experience. While this may have been a reasonable fear back in 2015, web technology has seen huge advancements in the past few years that makes the lives of small business owners much simpler.
Here are the main reasons why you shouldn’t delay building your website:
- All legitimate businesses have websites - full stop. The size or industry of your business does not matter when it comes to getting your business online.
- Social media accounts like Facebook pages or LinkedIn business profiles are not a replacement for a business website that you own.
- Website builder tools like the GoDaddy Website Builder have made creating a basic website extremely simple. You don’t need to hire a web developer or designer to create a website that you can be proud of.
Using our website building guides, the process will be simple and painless and shouldn’t take you any longer than 2-3 hours to complete.
STEP 10: Set up your business phone system
Getting a phone set up for your business is one of the best ways to help keep your personal life and business life separate and private. That’s not the only benefit; it also helps you make your business more automated, gives your business legitimacy, and makes it easier for potential customers to find and contact you.
There are many services available to entrepreneurs who want to set up a business phone system. We’ve reviewed the top companies and rated them based on price, features, and ease of use.
Recommended: Find the best phone system for your business; check out our review of the Best Business Phone Systems 2021.
Start A Debt Collection Agency In Your State
Select your state below for an in-depth guide on completing each of these steps in your home state.
Is this Business Right For You?
You must be able to persevere and take rejection well. You’ll often find yourself in uncomfortable positions in contacting individuals who owe money and don’t want to pay. They might be hostile, embarrassed, frightened, or unwilling to talk to you at all, but you can’t be defeated by all of the negative attitudes you’ll encounter.
You should also have the sales ability to gain the trust and confidence of clients.
Want to know if you are cut out to be an entrepreneur?
Take our Entrepreneurship Quiz to find out!
What happens during a typical day at a debt collection agency?
Here are several of the responsibilities you’ll most typically undertake on a daily basis.
- Soliciting the debt collection business of companies who’ve extended credit to customers
- Contacting debtors to encourage repayment on behalf of your business clients
- Performing skip trace investigations to find debtors with little or no valid contact information
- Collecting debtor payments and returning extended credit amounts (minus your commissions) to clients
What are some skills and experiences that will help you build a successful debt collection agency?
Can you be both firm and diplomatic? If you come on too strong with debtors they’ll hang up or slam the door in your face. On the other hand if you seem weak those who owe money might ignore or try to intimidate you. You’ll be most successful at this business if you can maintain a sense of equilibrium even during the most stressful times
You should also be a good judge of character. This will help you not only while you negotiate payments but as you begin to interview prospective debt collectors when you build your business.
What is the growth potential for a debt collection agency?
Businesses will always find themselves in positions where customers who’ve been extended credit are unable or unwilling to pay back. The most challenging of economic times will bring you more opportunities, but on the other hand hard times are when debtors are least likely to be able to repay.
The U.S. Bureau of Labor Statistics forecasts a six percent decline in the job outlook for Bill and Account Collectors between the years 2014 and 2024, but that could change if there’s an economic downturn.
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Take the Next Step
Find a business mentor
One of the greatest resources an entrepreneur can have is quality mentorship. As you start planning your business, connect with a free business resource near you to get the help you need.
Having a support network in place to turn to during tough times is a major factor of success for new business owners.
Resources to Help Women in Business
There are many resources out there specifically for women entrepreneurs. We’ve gathered necessary and useful information to help you succeed both professionally and personally:
If you’re a woman looking for some guidance in entrepreneurship, check out this great new series Women in Business created by the women of our partner Startup Savant.
What are some insider tips for jump starting a debt collection agency?
Do your homework. The Fair Debt Collections Practices Act sets the stage for what collection agencies can and can’t do legally. Your state might have additional laws and regulations, so make sure you’re in compliance with those as well.
As for generating clients, you might start by cold calling the credit departments of leading credit-extending companies in your marketing area. You can also buy charged-off debt online. This strategy is a bit of a gamble since these are transactions that other agencies have given up on. As a result, the debt can be obtained for pennies on the dollar, but the collection process will be arduous and often a losing battle.
How and when to build a team
You can hire debt collecting staff at little cost by adopting a commission-based payment model. Therefore, consider making a hire anytime you see someone who looks like they have the right personality to chase down debt.