Starting a collection agency can be very profitable. With proper planning, execution and hard work, you can enjoy great success. Below you will learn the keys to launching a successful collection agency.
Importantly, a critical step in starting a collection agency is to complete your business plan. To help you out, you should download Growthink’s Ultimate Business Plan Template here.
14 Steps To Start a Collection Agency:
- Choose the Name for Your Collection Agency
- Develop Your Collection Agency Business Plan
- Choose the Legal Structure for Your Collection Agency
- Secure Startup Funding for Your Collection Agency (If Needed)
- Secure a Location for Your Business
- Register Your Collection Agency with the IRS
- Open a Business Bank Account
- Get a Business Credit Card
- Get the Required Business Licenses and Permits
- Get Business Insurance for Your Collection Agency
- Buy or Lease the Right Collection Agency Equipment
- Develop Your Collection Agency Marketing Materials
- Purchase and Setup the Software Needed to Run Your Collection Agency
- Open for Business
1. Choose the Name for Your Collection Agency
The first step to starting a collection agency is to choose your business’ name.
This is a very important choice since your company name is your brand and will last for the lifetime of your business. Ideally you choose a name that is meaningful and memorable. Here are some tips for choosing a name for your own debt collection agency:
- Make sure the name is available. Check your desired name against trademark databases and your state’s list of registered business names to see if it’s available. Also check to see if a suitable domain name is available.
- Keep it simple. The best names are usually ones that are easy to remember, pronounce and spell.
- Think about marketing. Come up with a name that reflects the desired brand and/or focus of your collection agency.
2. Develop Your Collection Agency Business Plan
One of the most important steps in starting a debt collection agency is to develop your business plan. The process of creating your plan ensures that you fully understand your market and your business strategy. The plan also provides you with a roadmap to follow and if needed, to present to funding sources to raise capital for your business.
Your business plan should include the following sections:
- Executive Summary – this section should summarize your entire business plan so readers can quickly understand the key details of your collection agency.
- Company Overview – this section tells the reader about the history of your collection agency and what type of collection agency you operate. For example, are you a commercial collection agency, consumer collection agency, or a debt buyer?
- Industry Analysis – here you will document key information about the debt collection industry. Conduct market research and document how big the industry is and what trends are affecting it.
- Customer Analysis – in this section, you will document who your ideal or target customers are and their demographics. For example, how old are they? Where do they live? What do they find important when purchasing services like the ones you will offer?
- Competitive Analysis – here you will document the key direct and indirect competitors you will face and how you will build competitive advantage.
- Marketing Plan – your marketing plan should address the 4Ps: Product, Price, Promotions and Place.
- Product: Determine and document what products/services you will offer
- Prices: Document the prices of your products/services
- Place: Where will your business be located and how will that location help you increase sales?
- Promotions: What promotional methods will you use to attract customers to your collection agency? For example, you might decide to use pay-per-click advertising, public relations, search engine optimization and/or social media marketing.
- Operations Plan – here you will determine the key processes you will need to run your day-to-day operations. You will also determine your staffing needs. Finally, in this section of your plan, you will create a projected growth timeline showing the milestones you hope to achieve in the coming years.
- Management Team – this section details the background of your company’s management team.
- Financial Plan – finally, the financial plan answers questions including the following:
- What startup costs will you incur?
- How will your collection agency make money?
- What are your projected sales and expenses for the next five years?
- Do you need to raise funding to launch your business?
3. Choose the Legal Structure for Your Collection Agency
Next you need to choose a legal structure for your collection agency and register it and your business name with the Secretary of State in each state where you operate your business.
Below are the five most common legal structures:
1) Sole proprietorship
A sole proprietorship is a business entity in which the owner of the collection agency and the business are the same legal person. The owner of a sole proprietorship is responsible for all debts and obligations of the business. There are no formalities required to establish a sole proprietorship, and it is easy to set up and operate. The main advantage of a sole proprietorship is that it is simple and inexpensive to establish. The main disadvantage is that the owner is liable for all debts and obligations of the business.
2) Partnerships
A partnership is a legal structure that is popular among small businesses. It is an agreement between two or more people who want to start a collection agency together. The partners share in the profits and losses of the business.
The advantages of a partnership are that it is easy to set up, and the partners share in the profits and losses of the business. The disadvantages of a partnership are that the partners are jointly liable for the debts of the business, and disagreements between partners can be difficult to resolve.
3) Limited Liability Company (LLC)
A limited liability company, or LLC, is a type of business entity that provides limited liability to its owners. This means that the owners of an LLC are not personally responsible for the debts and liabilities of the business. The advantages of an LLC for a collection agency include flexibility in management, pass-through taxation (avoids double taxation as explained below), and limited personal liability. The disadvantages of an LLC include lack of availability in some states and self-employment taxes.
4) C Corporation
A C Corporation is a business entity that is separate from its owners. It has its own tax ID and can have shareholders. The main advantage of a C Corporation for a collection agency is that it offers limited liability to its owners. This means that the owners are not personally responsible for the debts and liabilities of the business. The disadvantage is that C Corporations are subject to double taxation. This means that the corporation pays taxes on its profits, and the shareholders also pay taxes on their dividends.
5) S Corporation
An S Corporation is a type of corporation that provides its owners with limited liability protection and allows them to pass their business income through to their personal income tax returns, thus avoiding double taxation. There are several limitations on S Corporations including the number of shareholders they can have among others.
Once you register your collection agency, your state will send you your official “Articles of Incorporation.” You will need this among other documentation when establishing your banking account (see below). We recommend that you consult an attorney in determining which legal structure is best suited for your company.
4. Secure Startup Funding for Your Collection Agency (If Needed)
In developing your collection agency business plan, you might have determined that you need to raise funding to launch your business.
If so, the main sources of funding for a collection agency to consider are personal savings, family and friends, credit card financing, bank loans, crowdfunding and angel investors. Angel investors are individuals who provide capital to early-stage businesses. Angel investors typically will invest in a collection agency that they believe has high potential for growth.
5. Secure a Location for Your Business
When looking for a location for your collection agency, it is important to find a space that is affordable and has the potential to grow with your business. You also want to be sure that the area is well-populated, as you will want to have access to as many potential clients as possible.
6. Register Your Collection Agency with the IRS
Next, you need to register your business with the Internal Revenue Service (IRS) which will result in the IRS issuing you an Employer Identification Number (EIN).
Most banks will require you to have an EIN in order to open up an account. In addition, in order to hire employees, you will need an EIN since that is how the IRS tracks your payroll tax payments.
Note that if you are a sole proprietor without employees, you generally do not need to get an EIN. Rather, you would use your social security number (instead of your EIN) as your taxpayer identification number.
7. Open a Business Bank Account
It is important to establish a bank account in your collection agency’s name. This process is fairly simple and involves the following steps:
- Identify and contact the bank you want to use
- Gather and present the required documents (generally include your company’s Articles of Incorporation, driver’s license or passport, and proof of address)
- Complete the bank’s application form and provide all relevant information
- Meet with a banker to discuss your business needs and establish a relationship with them
8. Get a Business Credit Card
You should get a business credit card for your collection agency to help you separate personal and business expenses.
You can either apply for a business credit card through your bank or apply for one through a credit card company.
When you’re applying for a business credit card, you’ll need to provide some information about your business. This includes the name of your business, the address of your business, and the type of business you’re running. You’ll also need to provide some information about yourself, including your name, Social Security number, and date of birth.
Once you’ve been approved for a business credit card, you’ll be able to use it to make purchases for your business. You can also use it to build your credit history which could be very important in securing loans and getting credit lines for your business in the future.
9. Get the Required Business Licenses and Permits
The licenses and permits you need to start a collection agency will depend on your state. You will likely need a business license, a collections license, and a credit services organization license. Contact your local jurisdiction to find out about the specific licensing requirements in your state.
10. Get Business Insurance for Your Collection Agency
The type of insurance you need to operate a collection agency will depend on the type of business.
Some business insurance policies you should consider for your collection agency include:
- General liability insurance: This covers accidents and injuries that occur on your property. It also covers damages caused by your employees or products.
- Workers’ compensation insurance: If you have employees, this type of policy works with your general liability policy to protect against workplace injuries and accidents. It also covers medical expenses and lost wages.
- Commercial property insurance: This covers damage to your property caused by fire, theft, or vandalism.
- Business interruption insurance: This covers lost income and expenses if your business is forced to close due to a covered event.
- Professional liability insurance: This protects your business against claims of professional negligence.
Find an insurance agent, tell them about your business and its needs, and they will recommend policies that fit those needs.
11. Buy or Lease the Right Collection Agency Equipment
To run a collection agency, you need some basic office equipment like a computer, internet connection, phone, and desk. You’ll also need a fax machine, postage machine, and scanner.
12. Develop Your Collection Agency Marketing Materials
Marketing materials will be required to attract and retain customers to your collection agency.
The key marketing materials you will need are as follows:
- Logo: Spend some time developing a good logo for your collection agency. Your logo will be printed on company stationery, business cards, marketing materials and so forth. The right logo can increase customer trust and awareness of your brand.
- Website: Likewise, a professional collection agency website provides potential customers with information about the debt collection services you offer, your company’s history, and contact information. Importantly, remember that the look and feel of your website will affect how customers perceive you..
- Social Media Accounts: establish social media accounts in your company’s name. Accounts on Facebook, Twitter, LinkedIn and/or other social media networks will help customers and others find and interact with your collection agency.
13. Purchase and Setup the Software Needed to Run Your Collection Agency
The software needed to run a collection agency is a collection management system (CMS). This system helps automate the process of collecting debts. Additionally, it helps manage the workflow of the agency. A quality CMS system will also generate reports on the agency’s performance.
14. Open for Business
You are now ready to open your collection agency. If you followed the steps above, you should be in a great position to build a successful business. Below are answers to frequently asked questions that might further help you.
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How to Start a Collection Agency FAQs
Is it hard to start a collection agency?
No, it is relatively easy to start a debt collection company. However, there are many important factors to consider before starting such a business, including understanding the applicable debt collection laws and regulations and fair debt collection practices, developing a sound business plan, and assembling a qualified team of professionals.
How can I start a collection agency with no experience?
There are a few things to do before starting a collection agency if you have no experience. First, research the industry and learn the laws and regulations that apply to debt collection agencies. Next, you can attend workshops or courses on how to start your own business.You may also want to reach out to industry professionals for advice. Finally, develop a business plan and create a marketing strategy.
What type of collection agency is most profitable?
There is no definitive answer to this question because profitability depends on many factors. However, in general, debt collection agencies that collect more significant amounts of money are more profitable than those that collect small sums of money. This is because the collection agency earns a commission on the total amount recovered, so the higher the amount, the greater the profit. Additionally, a debt collection agency operated out of a home office may be quite profitable because there is little overhead.
How much does it cost to start a collection agency?
The cost of starting a collection agency can vary depending on the size and scope of the business. Generally, start-up costs will range from $10,000 to $20,000. This includes the costs of licensing, marketing, and equipment.
What are the ongoing expenses for a collection agency?
The ongoing expenses for a debt collection business include the cost of collection letters, phone calls, and legal action. Other expenses may include the cost of credit reports. Additionally, rent, utilities, and marketing costs are typical ongoing expenses for most collection businesses.
How does a collection agency make money?
A successful debt collection agency makes money by charging a commission on the total amount of money recovered from debtors. In addition, debt collectors earn interest on any money held in their possession. Collection agencies also charge fees for their services, which can range from a flat rate to a percentage of the total amount collected.
Is owning a collection agency profitable?
Yes, collection agencies are a type of business that can be quite profitable. The reason for this is because they provide a necessary service. People often need help collecting money that is owed to them, and collection agencies provide this service. They also have a low overhead, which makes them even more profitable.
Why do collection agencies fail?
Collection agencies often fail because they do not have the proper systems in place to track and manage payments. This can lead to confusion and late payments, which can ultimately hurt the agency's bottom line. Additionally, many collection agencies rely on aggressive tactics to get people to pay, which can alienate customers and damage the agency's reputation.
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