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Starting a Debt Collection Agency from Home – A Complete Guide

Are you interested in starting a collection agency from home? If YES, here is a complete guide to starting a debt collection business with NO money and no experience.

Okay, so we have provided you an in-depth sample collection agency business plan template. We also took it further by analyzing and drafting a sample debt collection service marketing plan backed up by actionable guerrilla marketing ideas for collection agency businesses. In this article, we will be considering all the requirements for starting a collection agency business. So put on your entrepreneurial hat and let’s proceed.

How Does a Debt Collection Agency Work?

A collection agency is a third party company that collects debts on behalf of businesses like hospitals, medical clinics, music and book clubs, or credit card companies from customers that owe them. It is not required that anyone looking to start this business has a degree in finance, economics, business or mathematics, but it will be highly beneficial if they do, as is a previous experience in this field.

How Do Debt Collection Agencies Make Money?

A collection agency earns money in a couple of different ways, either through getting a one to five percent commission on the amount to be collected for the client, or buy bad debt at a discount off the face value and then collect the entire debt amount.

What Does It Take to Start a Debt Collection Agency Successfully?

Before starting out this kind of business, you would need to learn about federal and state collection laws, because the federal government and some state government have regulations on how a debt collection agency can attempt to collect debts from businesses or consumers.

You will next need to obtain a license by contacting the finance officer of the state you want to operate your collection agency business in, to learn about the specific licenses that would be required before you can operate. In some states, a collection agency is regarded as a money service business, and thus in such states, the business must be registered as such. In Texas for instance, a collection agency must obtain a surety bond before pursuing any debt collection.

After that, the collection agency creates a series of collection letters which are form letters that can be part of a mail merge and sent in bulk, and is then sent to debtors before attempting to collect. The series of the collection letters are particularly for clients who could not be gotten via telephone, or is sometimes as a follow-up based on phone interactions with the debtor. The collection agency will also need to establish a toll-free business phone that debtors can easily use to return phone calls, no matter where they live.

Finally, a collection agency that is ready for business will need to develop relationships with companies by calling them or sending a letter of introduction to the companies that can benefit from your business, and try to convert them to becoming your clients. Securing clients as a start-up should be pretty easy especially as you won’t get paid for your service until you have successfully collected the debt owed.

Here is a complete guide to start a collection Agency;

Starting a Debt Collection Agency from Home – A Complete Guide

  • Debt Collection Industry Overview

Performance in this industry is usually driven by the overall availability of collection opportunities, which can be referred to the number of defaulted accounts that an agency services. The growth in the industry from over recent years has been due to increased opportunities resulting from high delinquency levels. The rate of recovery is also an important component of industry performance, which largely speaks on the consumers’ ability to repay their liabilities.

  • Interesting Statistics About the Debt Collection Industry

In the United States, there are more than 60,000 businesses that operate as credit intermediaries which includes debt collection agencies. Among these business, aggregates revenue over the last five years have been in excess of $229 billion. These businesses have employed over 500,000 people. The internet has also helped debt collection agencies as they can receive information at a much faster rate. According to the United States, Bureau of Labor Statistics, as at 2008, there were 411,000 jobs available to collection agencies, which saw new agencies springing up.

Demand for the collections services is driven by the volume of financial transactions, and the health of the economy. Individual companies’ profitability depends largely on the efficiency of operations. Large companies enjoy economies of scale because they are able to buy receivable portfolios, while smaller companies can compete by providing excellent customer service. This industry is highly fragmented, with the 50 largest companies accounting for about 45% of revenue.

Job growth for debt collection agencies is expected to be 15% by 2022. As at 2012, there were approximately 397,000 debt collectors employed in the United States, and projected employment for the industry is more than 455,000 by 2022. As at 2013, the collection industry saved the average American household $389, this is the amount the households would have spent if businesses were forced to raise prices to cover bad debts.

In 2013, agencies recovered approximately $55.2 billion in total debt, on which $10.4 billion were earned in commissions and fees. The five states with the highest total debt collected were New York ($5.4 billion), Texas ($4.9 billion), California ($4.6 billion), Illinois ($2.9 billion) and Florida ($2.7 billion).

Starting a Collection Agency from Home – Market Feasibility and Research

  • Demographics and Psychographics

The demographic and psychographic composition of those who need the services of a collection agency are those who have people owing them and would want their money back, such as;

  • Schools
  • Hospitals
  • credit card agencies
  • music clubs
  • book clubs
  • all that is need of the services of a collection agency

Others are Young people who have racked up college loans, medically ill patients who have run out of insurance or money, adults who max out their credit cards, and other such kind of people, are those that the collection agency goes after.

List of Niche Ideas within the Debt Collection Industry

The aim of a collection agency is to ensure that debts are collected on behalf of their clients, with them getting paid for it. This means that all collection agencies everywhere perform the same service only differing in the methods used to perform the service.

However, there are some areas of specialization within the collection agency industry and an entrepreneur can make a decision on which area to go into, the areas include;

  • medical services
  • school services
  • credit cards specialization
  • commercial and other such kinds of specialization

The thing about these specialized areas is that an entrepreneur starting out on a small scale can decide to go into an area, mastering that area before adding another area to his services. However larger collection agencies can focus on all areas and offer services effectively.

The Level of Competition in the Collection Agency Industry

Starting a collection agency might not be too expensive but it definitely has stringent rules and so any entrepreneur must recognize this fact. Collection agencies constantly compete amongst themselves in offering services that are not considered intrusive by the debtors.

While larger collection agencies can afford to employ different persuasive means to ensure that they achieve their target regardless of the costs involved, smaller collection agencies have to confine themselves to methods that would not increase their operating costs unnecessarily. Smaller collection agencies usually take on small and medium sized clients, so as to be able to offer their services effectively.

List Of Well – Known Brands in the Debt Collection Industry

Branding is a core concept of a business that has entrenched itself into the consciousness of the consumer. While some brands struggle to achieve recognition with consumers, others are quickly embraced by the market place, thereby helping them scale their promotional footprint to compete with anyone in the demographic market sector. Below are some of the well known brands in the United States of America:

  • Your Collection Solution
  • White Plains Collection Agencies
  • Smyyth
  • Transworld Systems
  • Rapid Recovery Solution
  • Corpus Christi Collection Agencies

Economic Analysis

Before starting out a collection agency as an entrepreneur, you must first acquaint yourself with debt collection services so as to be able to make an informed decision on whether it is the right business for you or not. A debt collection agency is in the business of collecting debts, and so as an entrepreneur you must be able to assess your skills in running a business as well as collecting debts.

Another thing to analyze before starting up a collection agency is the demands will fit into your lifestyle, as it is time consuming, and can also be demanding emotionally and physically; you also have to meet federal and state requirements, especially as most states have specific laws on licensing, bonding and trust account requirements for debt collectors. You will also need to know about laws such as the Fair Debt Collection Practices Act, The Fair Credit Reporting Act, the Health Insurance Portability and Accountability Act, the Gramm-Leach-Bliley Act, and bankruptcy laws.

Debt collectors earn an average of $38,000 per year. This amount you pay your debt collectors can change depending on your clients, and if your agency is part of a franchise or independently owned by you. Also remember that you will have to pay taxes and other fees for your business and annual overhead such as bonding and insurance, payroll and office supplies.

Is the Collection Business Worth Starting from Scratch or is Buying a Franchise Better?

As long as you have been a part of debt collection services or the industry, and have the required knowledge and skills, you can start off the business from the scratch. This will ensure that you alone plan the strategies that will be adopted by the business, as well as how the business will attract and retain its clients. If you are starting off on a small scale and working in your neighborhood, it’d probably be best if you start from the scratch.

Buying a franchise also has its pros and cons. With a franchise, you do not have to worry about how to get clients for your business or approaches to use and grow the business, all you would need to worry about is just collecting debts for your clients. Starting the collection agency with a franchise or from the scratch will depend on the entrepreneur and his or her visions for the business.

Possible Threats and Challenges You Will Face When Starting a Collection Agency

Top performing debt collection agencies know that it is best for their clients if they continually develop, test, and execute new recovery strategies. However, many collection agencies still face challenges with dissatisfied customers especially on their failure to react in a timely manner to complaints and queries, due to the fact that most agencies rely on manual processing of queries between their customers and the different organizations involved in the recovery process.

Another challenge, collection agencies are facing is uncooperative debtors, especially with all the federal and state rules that weigh more in favour of these debtors than the agencies. Every entrepreneur or business always has a challenge, and this should not deter serious minded entrepreneurs from going into the business.

Starting a Collection Agency from Home – Legal Matter

  • Best legal entity to use for this Collection Agency

Every business start-up has various legal responsibilities to fulfill especially as regards legal entities. The legal entities exist so as to protect your business and avoid costly penalties. As a collection agency, even though you can operate from home, you will be in need of a legal entity especially as the business has stringent attachments to it.

There are various ways that a business venture can be structured as the different business types are distinguished by the number of people that own the business, the personal liability of the owners, the tax advantages and the simplicity in forming the entity. If you decide to be a sole proprietor, the legal name for your business is your full name, or you file a fictitious name registration with your state’s agency, if you intend to use another name other than yours.

The legal business entity you decide to use such from sole proprietorship, Limited Liability Companies (LLCs), partnerships to Corporations; will determine the type of additional paperwork that you will need. The forms are usually filed with the state government. You also would have to register for state and local taxes.

The easiest to form is a sole proprietorship, as it is initiated once the business starts. However, this is a venture that you would not want to be personally held liable for in case anything goes wrong. A corporation on the other hand has a number of variations for each such as S Corporations, and Limited Liability Corporations (LLC), and protects the owner from being personally held liable should anything go wrong.

Catchy Business Name ideas Suitable for a Collection Agency

Three are so many names that can be come up with when you want to start a collection agency. Here are some of them;

  • Perfect Collections Agency
  • Stevie’s Collection Solutions
  • Clearing Debts Agency
  • Stress-free Solution Agency
  • Reliable Collection Agency

The Best Insurance Needed for a Collection Business

The reason why it is advised that you get an insurance policy is for eventualities that would always be out of your control, such as health or a problem with the contract of your clients. You might be sued by a debtor for harassment, which is why an insurance policy is necessary for you and your client.

An insurance policy is expected to protect you and your business, while you do what you know how to do best, retrieve debts for clients. It is best if you speak to an insurance agent, as they will be able to guide you on the policy or coverage that best suits your debt collection agency.

Here are some of the basic insurance covers that you might have to consider getting if you want to start up your software development company in the United States of America:

  • Liability Insurance
  • Health Insurance
  • Errors and Omissions Insurance
  • Business Insurance
  • Life Insurance
  • Workers’ Compensation
  • Car Insurance

Does a Debt Collection Business Need Intellectual Property Protection?

Any entrepreneur that is considering starting a debt collection agency either on a small or large scale will surely not need to apply for intellectual property protection. This is a service oriented business, and production of any goods isn’t involved. However, intellectual property protection might be gotten for the logo of the company or the slogan, it is not considered an utmost priority and most people in the collections agency industry do not bother with getting one.

Does a Debt Collection Business Need Professional Certification?

If you are starting out on a small scale, you might not need and in a small neighborhood, or just handling very few clients, you might not have a need for a professional certificate.

However, if you are running a medium or large scale debt collection agency, you would need some of your debt collectors to be proficient and certified as a Debt Collection Compliance Specialist, this would be of immense benefit to your collection agency as it would mean that your company is focused on the Fair Debt Collections Practices Act (FDCPA), and will give your clients confidence in you, while boosting your company’s brand and profile. Other certifications are Certified Consumer Debt Collector and other such certifications as well.

List of Legal Documents You Need to Run a Collection Agency

These are some of the basic legal documents that you would need to successfully run a debt collections agency in the United States of America;

  • Business License and Permits
  • Insurance Policy
  • Tax Identification Number
  • Certificate of Incorporation
  • Insurance Policy
  • Business Plan
  • Contract Documents
  • Operating Agreements

Writing a Business Plan for a Collection Agency

Either written as a short term or a long term plan, a business plan is very vital in guiding your collection agency. This is because it helps to develop your business as well as accommodate for any unforeseen circumstances like lawsuit or an illness.

It is also necessary especially if you intend to show the local authorities or any financiers. The business plan needs to be as detailed as possible, considering every aspect of being a collection agency. It is also essential in listing responsibilities for owner and any employees. It will also help in creating a working list of services and fees that can be tailored to demand.

A business plan enables a business to establish a vision and determine the direction a business ought to go in. it also set goals, chart and review operations as well as establish and maintain fiscal fitness.

Every business plan is unique to the specific business that it is written for. Due to this, what is included in a business plan, from the analysis and details to the format of the plan is different for each business. However, as a general guideline, the elements of a business plan usually includes key elements such as executive summary which gives a brief summary of the information that will be provided in the plan, such as the company operations, marketing and financial overviews.

The other elements which are included in the business plan are as follows:

The purpose tells what your business is and why it exists. Other information include business description, structure, owners, location, hours of operation, product or service, target market, competitive edge or unique selling points, and any business achievements. It also includes mission statement, vision statement and value statement.

Other important elements such as the industry analysis, includes industry economics and trend, SWOT analysis, regulations, economic factors, price comparisons, competition, staffing, business operations, equipment, production or service, quality control, inventory and supply.

Lastly, a business plan should have market research which includes the demographics, psychographics, market segment, and marketing plan strategy and market share. As this might seem daunting for some entrepreneurs, one could make use of consultants that could help in writing out this business plan, or download a preschool business template online.

Detailed Cost Analysis for Starting a Collection Agency

The increase in income and the need to spend on essentials and non essentials have led to people racking up debts, which becomes a burden to the institutions these people owe. The institutions then look for means to get back their money, leading to them to contract the services of debt collection agencies.

Every state has its own regulations regarding the necessary requirements to legally operate a debt collection agency, as there are stringent rules by the federal and state government regarding how collection agencies carry out their task of getting back these fees for the creditors. Fees are usually charged by collection agencies on a flat rate or on percentage, depending on the agreement between the agency and their clients.

The actual start-up costs for your collection agency will depend on how as an entrepreneur you choose to establish and operate your business. If for instance, you operate from your residence, it will be far cheaper than having to rent or buy a facility; especially as you would be saving on rent and building costs maintenance. Other factors might be the number of staff you intend to recruit, and if you will engage in skip tracing.

In launching your own collection agency, these are the basic costs you would have to contend with:

  • Business incorporation fees $300
  • Licenses and Permits $700
  • Certifications $1,000
  • Facility fees $1,000
  • Utilities such as electricity, phone, water and garbage removal $500
  • Insurance $1,000
  • Supplies and Equipment such as computers, filing cabinets, software $1,000
  • Administrative and Marketing costs $300
  • Other operating costs $500

Going by the report from detailed research and feasibility studies, you will need an average of $6,300 to start a small scale collection agency in the United States of America. If you want to start a medium scale collection agency in the United States, you would need nothing less than $15,000

And if your intention is to start a large scale collection agency in the United States of America, then you might need over $30,000 for a start.

  • Financing Your Collection Agency Business

Regardless of the business you want to venture into as a serious minded entrepreneur, you will need capital that will get the business going. Most of what makes the cost of startup high is the operating equipment that is used in starting the business, which might not be so for this business, because you won’t need much equipment.

In financing a business, the entrepreneur has to remember that not all things might be needed to be purchased, and that the aim of the business is to make profit which can only be done after all expenses and tax has been deducted. However, a debt collection business does not require massive start up costs.

The amount of money you need to start the business will depend on the size and location of the business, the number of staff you want to recruit and the services your collection agency will offer. This is why a business plan is important as it provides a clear picture of how much your business would need, and that will determine if you can comfortably use your personal money, borrow from family, or go to an investor to get a loan. It might be difficult to obtain a loan from the bank, for this type of business even if you have a good business plan, and good credit.

Listed below are the options available to you when intending to finance your preschool business start-up:

  • Personal Savings, Property Equity, Unit Trusts, Insurance Policies
  • Family and friends
  • Personal Line of Credit
  • Partner
  • Small Business Administration Loans
  • Loan from investors

Choosing a Suitable Location for a Collection Agency

Deciding on the appropriate location for your collection agency start-up is very vital. In choosing a location for your business, it is important to know your goals, vision, and marketing strategies you intend to adopt for your collection agency.

If you are going to open your collection agency in a commercial area, it should be a place that would be close to as many clients that you intend to service as possible. This does not mean that you limit your collection agency to just the commercial area, as your agency could be located anywhere, as long as it can be accessed by your clients.

If you locate your business in an area, where people live below the poverty line, you would not get people to patronize you as they are probably debtors themselves. If your home is far from where business will likely be favorable for you, it is advisable you get an office facility, even if it is a small one, but otherwise run the business from home, so as to keep your operating costs at a minimum.

If you intend to operate from home, you will have to ensure that you live close to the commercial areas, so you don’t waste gas on marketing for prospective client before you have even started the collection business.

Thankfully, you can operate this kind of business from home or even as a part-time job, especially as you might be the only employee for a while. Moving to a facility either big or small will depend on how many employees you need to employ to help with the demands that might be more than you can handle. If you are going to have very few people working with you, you could still hold off on renting a facility and might decide to move to your garage instead.

Starting a Collection Agency from Home – Technical & Manpower Details

There is little technicality required for the collection agency business, even though it might require the ability to be able to use a debt collection software, the computer to send mails, and phones. Also most of the equipment that would be used like the car and computer can be gotten for cheap either as fairly used or in online stores. And if you manage these two tools well, you might not need to get another in a long period.

For those intending to operate from an office facility or even from home on whatever scale, here are some of the equipment that would be needed:

  • Computer
  • Debt Collection Software
  • Van
  • Phones
  • Filing Cabinets
  • Contract documents

Due to the nature of this business, the collection agency business can be run from home. If you want to get an office facility, it should be if you are handling a high volume of clients, and would require a place where they can meet with you during official hours.

The number of people that would be needed to run a collection agency business is one that can be decided on by the entrepreneur as the business grows, as one person can effectively run the business at first. However, if you are looking to run a medium or large scale enterprise, you could employ between 4 to 6 people and above, such as manager, collection agents, and call handlers. The office would need minimal and functional equipment such as computers, phones.

The production Process in a Collection Agency Business

There is no production process involved in the debt collection agency business as this is a service delivery business. The process involved usually range from ensuring that the right documents and mails get to the right individuals or debtors, as well as ensuring that debts paid your clients are gotten back so you could earn your fee.

The other process is being able to skip trace that is, trace debtors that have skipped town due to one reason or the other.

Starting a Collection Agency from Home – The Marketing Plan

  • Marketing ideas and strategies for a debt collection business

As with every other business, your debt collection agency needs marketing ideas and strategies, in order for you to gain clients as well as grow your business. Marketing ideas and strategies not only define and direct the marketing activities that are intended to build customer base, but also aim at increasing revenue as well. A marketing strategy will create goals, whilst encouraging a business to expand.

For businesses where owners work from home, especially ones that deals in service delivery, marketing is very essential, because you do not have the advantage of a storefront that will advertise your business to anyone that passes. Ensure you narrow your marketing strategies to a few key industries such as medical institution, mortgage companies, or credit card companies.

Depending on your marketing budget, you can decide on what avenues should be explored for your collection agency, which is why most entrepreneurs set aside a huge marketing budget for their businesses, so as to make use of all means and wide options available instead of being restricted to limited options due to a tight budget.

Also, it is wise to carry out a thorough research before spending on advertising and marketing, so that you know the best areas that bring in results, instead of splurging the money with no plan in mind. Below are some of the marketing strategies and ideas that can be adopted for your collection agency business:

  • Introduce your business by sending introductory letters alongside your brochure to potential clients.
  • Listing your business in local directories
  • Use of referrals by creating a referral network
  • Create a website that caters to creditors and debtors, and then send regularly scheduled mails to them, telling them of collection agencies and why yours is the best.
  • Attend collection associations and network with others
  • Use the social media and forums to create awareness of your business.

Factors That Will Help You Get the Right Product Pricing for your Collection Agency

The right fees to charge for your debt collection agency will be dependent on your vision for your company and how you intend for it to operate. You can charge on a percentage basis, a flat fee or a combination of both kinds of fees, whatever suits you and your clients. Another factor that could increase your fees would be if the debts are older than six months, as the older the debt gets the higher you can charge.

Possible Competitive Strategies for Winning Your Competitors

Except you are running a monopolistic business, you would always need competitive strategies to stay afloat. Also competitive strategies ensure that your collection agency remains proactive in delivering of services, as clients will always be on the lookout for collection agencies that deliver the best of services.

Customers are drawn to incentives; ensure that you design your collection agency business in such a way that you can afford to give out incentives from time to time, like tagging your discounts to a special day or month, which in turn will see more clients referring more debtors your way, while still offering optimal service regardless of the workload.

You could also seek to make the lives of your clients easier, by providing more convenient options by which they can use to reach out to you. This means that instead of just limiting your contact to a cell phone or landline, ensure that they can reach out to your company by mail, through your website, or any other means possible.

Possible Ways to Increase Client Retention for your Collection Agency Business

According to studies from the United States Small Business Administration and the United States Chamber of Commerce, it found that acquiring new customers can cost as much as seven times more than just retaining existing customers.

One of the smartest way to increasing customer retention for your collection agency is in setting client expectations early and a bit lower than your business can provide, which will then eliminate uncertainty as to the level of service you would need to offer to ensure your clients being happy.

Strategies to Boost your Brand Awareness and Create a Corporate identity for your Collection Agency

It is important that strategies are created to help boost your brand awareness as well as create a corporate identity for your collection agency business. If you want your debt collection business to be known to existing and potential clients, you would need to look for ways to promote the brand and if possible, get brand experts that will help you in handling it.

Below are the platforms that can be used to boost the brand of your company as well as advertise your business:

  • Attend conferences and workshops to network with other debt collection businesses.
  • Distributing your handbills, fliers and business cards to people around you, and in places you go to.
  • Encourage your loyal customers to help with referrals
  • Use blogging as a tool to reach out to existing and potential clients.
  • Use the social media as a long-term and cumulative process, such as Linkedin, Twitter and Facebook.
  • Create a website and use it to promote your business.

Creating a Suppliers/Distribution Network for a Debt Collection Agency

If you run a standard debt collection business, then you would have to work, network and partner with clients to help in delivering jobs, and database companies to help with debtors who have skipped town.

This means that you have to be in a good business relationship with your clients, so that they could always send business your way. In essence, it is always good to be in a good relationship with your business partners, as it will help the bottom line of your business.

Tips for Running a Collection Agency Business Successfully

To be truly successful in this field, you would need to have worked in the field, made friends and networked so as to have knowledge of the business you are going into, as well as the clients that you would eventually need to go after. A debt collection agency helps his client to recover bad and doubtful debts, while also helping out with debt prevention and management.

Finally, there is no better advertisement for your collection agency than really having a good amount of turnovers. Customers are happy when a brand or business they patronize goes the extra mile for them. Listen to the complaints of your customers, and learn from it. This way you can make your business, the one and only one people call.

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