How to Start a Collection Agency

In the U.S., collection agencies play an important role in the economy. Through the work of debt collection companies, many businesses and governmental entities are able to collect the money they are owed. Debt collection services also encourage lenders to extend more credit to consumers because debt collectors help to recover more debts than banks and other lenders might be able to collect on their own. Through their work, debt collectors help to keep prices down, which leads consumers to more fully participate in the economy.

Starting a debt collection agency can also provide you with a way to become your own boss while building your small business from the ground up. Becoming an entrepreneur and starting a debt collection business as a startup will require you to familiarize yourself with multiple laws and regulations that govern the debt collection industry, including the Fair Debt Collection Practices Act (FDCPA), the Fair Credit Report Act (FCRA), and others. Since debt collectors handle sensitive consumer information while trying to recover bad debt, debt collection business owners must strictly comply with the law and take steps to ensure that they do not violate consumer rights.

Obtaining a collection agency license and opening your own business can offer you multiple benefits. Since debt collection requires little more than access to high-speed internet, a phone, and some other simple types of equipment, you might be able to initially start your new business from your home. You can also opt to open a franchise to have backing from an established debt collection business, which can allow you to focus your work on collections. Operating a collection agency also can be a great option if you enjoy speaking with people and have good communication skills. Since the total outstanding consumer debt, including credit card debt, in the U.S., is currently around $4.2 trillion, and millions of Americans have outstanding student loan debt, debt collection offers many opportunities.

Understanding how to start a debt collection agency will depend on the state in which you live and where you want to do business. Most states require debt collection agencies to obtain licenses and to secure a collection agency bond. There are other requirements you will have to take care of when starting a new business. Here are some tips for how to start your own collection business.

Learn About State Requirements for Setting up a Business

No matter where you live, most states have extensive requirements that you must meet if you want to open a business. The requirements you might have will depend on the state where you plan on operating your business. These requirements also sometimes change, so it’s important to keep current with the law in your state. However, there are some general requirements that apply in most states.

1. Write Your Business Plan.

Writing a business plan provides a roadmap for how your business will be conducted. For example, decide whether you plan to only perform debt collection services for certain types of debts or if you will also perform skip tracing and other similar services. If you plan to apply for startup loans, lenders will require you to submit a copy of your business plan with your loan application. Planning also allows you to map out how to grow your business and make it successful.

2. Identify Funding Sources.

Writing a business plan will help you to figure out how much capital you will need. You can then do some research to identify funding sources.

3. Determine Where Your Business Will Be Located.

Decide whether you will start out by operating your business from home or if you will instead open a brick-and-mortar location. Whichever you decide, you should make sure that you meet your city’s zoning requirements.

4. Choose a Business Entity Structure.

The next thing you need to do is to choose a legal entity structure for your debt collection company. There are several possibilities, including the following:

• C corporation – Offers the greatest degree of limited liability protection for its shareholders but is among the most complex business structures with extensive requirements
• S corporation – Provides some of the same benefits as a C Corporation but is a pass-through entity
• Limited liability company – Provides limited liability protection to owners and can be owned by one or more people
• Partnership – Structure set up by two or more owners through a partnership agreement
• Sole proprietorship – Simplest business structure but provides no liability protection

For most businesses, it is a good idea to choose a structure that provides some liability protection to protect your personal assets in case your company is sued. Many new business owners choose to structure their companies as limited liability companies (LLC) because of the ease of setting them up.

5. Choose Your Business Name.

You will need to choose a business name under which your business will operate. 

6. Register Your Business.

You will need to register your business with the state. This can be more complicated as a collection business because you will have to register your business and possibly obtain a license in every state in which you collect the debt. For example, if you are trying to collect a debt from someone who lives in a different state, you will need to get properly licensed there as well. We will discuss this later in this article. 

7. Apply for Your Federal and State Tax ID Numbers.

You will need to apply for a Federal Employer Identification Number (FEIN) with the IRS if you are operating an LLC, partnership, or corporation. If you structure your business as a sole proprietorship, you can use your Social Security number as your federal tax ID number. Some states also require businesses to obtain state tax ID numbers. You will need to check with your state to determine what it requires.

8. Open a Business Bank Account.

Once you have your FEIN and have registered your business, you will need to open a business bank account. It is important to keep your company’s money separate from your own for tax and accounting purposes.

These are the basic steps for starting any business. Below, we’ll explore the requirements for opening a collection company more in-depth.

Plan for Your Startup Costs

Many new business owners fail to properly plan so that they understand how much capital they will need to get through the startup phase successfully. If you have not planned for how to pay for your startup costs, it can make it difficult for you to get your business off the ground even if you successfully secure all of the licenses you might need. If you do not have enough capital to get your business started and survive until it starts earning profits, your business will likely fail.

When you are trying to plan for your startup costs, plan for both the operating expenses and capital that you will need for two or more years. This can help to provide a cushion so that your business will be likelier to succeed.

Consider the following types of expenses you will need to plan for during those initial two years:

• Business cards
• Office supplies
• Health insurance
• General liability insurance
• Phones
• Headsets
• Computers
• High-speed internet
• Debt collection software
• Consumer protect collection agency license
• Social media business pages and advertising costs
• Collection agency bond
• Salaries
• Employee expenses
• Your own debt and expenses until your business is profitable

Your business license and bond costs will depend on how many states you plan to collect debt in. As a debt buyer, you might also need to factor in the cost of purchasing an initial portfolio to collect and your business registration costs. 

Learn About Debt Collection Laws

All businesses that deal with money are heavily regulated. There are multiple laws that you must follow as a debt collection business owner. You will need to research the laws in each state in which you plan to operate. The following federal laws apply to you and the collection process regardless of which state(s) you plan to operate:

• Fair Debt Collection Practices Act (FDCPA) – This law limits the actions third-party debt collection agencies can take when collecting debts on behalf of a creditor and places multiple restrictions on time of day, number of calls, and language used when attempting to collect consumer debts. If you violate any of the provisions of this law, affected debtors can file lawsuits against you within one year.

• Fair Credit Reporting Act (FCRA) – This law regulates how consumer reporting agencies can collect, gather, and report consumer credit information and provides consumers the right to access their information.

• Health Insurance Portability and Accountability Act (HIPAA) – This law describes how insurance companies, healthcare providers, and healthcare facilities can provide some of their patients’ information to collection agencies to allow them to pursue the bad medical debt.

• Telephone Consumer Protection Act (TCPA) – This law regulates conduct during solicitations made through phone calls.

• Gramm-Leach-Bliley Act (GLBA) – This law controls how financial institutions handle consumers’ private information.

It is critical that you understand what you are allowed to do and what you must avoid doing under these laws and the laws in each state in which your business will operate. You should incorporate information from these laws into any training you develop for your company. If individual collectors employed by your business violate the FDCPA, for example, both the collector and your company could be liable to pay damages in a lawsuit.

Get a Business License

After you have completed the other steps and have purchased a collection agency bond, you will be able to apply for a debt collection license in each state in which you intend to operate.

Each state will have its own requirements for what you need to include with your application. For example, you might have to provide copies of your articles of incorporation, financial information, personal information, and proof of limited liability coverage and your bond.

In some states, you might also be required to have a physical office space and business phone number. Make sure to understand what is required early in the process to avoid problems. The primary purpose of an office requirement is to have an established location for debtors to make walk-in payments. The state will also need your business address and contact information as a point of contact with the state’s licensing division and for any investigations or audits.

The process of starting a debt collection business and obtaining your licenses can be time-consuming. Make sure to start early and plan for the process to take months to accomplish all of the steps involved. However, with careful planning, you can start your own collection agency and begin building your future as a successful business owner. Once you get started, make sure you always exercise good business practices to avoid potential claims on your bond.

Get a Collection Agency Bond

In many states, including New York and others, collection agencies are required to purchase a collection agency bond as a part of the licensing requirements.

A collection agency bond is a surety bond that is primarily designed to protect creditors and not you as a debt collection business. Typically, collection agencies collect on debts for third-party creditors and are paid contingent fees based on how much money they collect. If you collect money on behalf of a creditor but fail to remit it, the creditor can file a claim against your bond. You will then be liable for paying any valid claim.