How to Start a Credit Repair Business
Did you know that one-third of employers in the US do credit checks on candidates, and one in 10 of those candidates gets passed over for a position because of a bad credit rating (review42)? Statistics like these make a good credit score essential and credit repair services valuable.
Credit repair businesses offer a valuable service to consumers who are struggling to improve their credit score. By working with credit reporting agencies and creditors, these businesses can help remove negative items from credit reports, dispute inaccuracies, and negotiate better terms for their clients.
If finance, accounting, math, and business management are your expertise and you have excellent communication and negotiation skills, then starting your own credit repair business might be the right fit.
According to the Cambridge Dictionary, credit repair is “the process by which a person or business improves their ability to borrow money, for example, by correcting wrong information in their credit report or reducing their debt more quickly”.
As a credit repair service, your business will search for, identify, and dispute incorrect information from the credit bureaus that may appear on your client’s credit report. The goal is to improve your client’s credit rating.
According to the most recent IBISWorld report, this industry reached a market size of 4 billion this year and comprises 44,404 businesses, employing close to 53,000 staff.
Its largest products and services segments by far are debt collectors and debt buyers – almost 40%, followed by mortgage and credit card services which each make up nearly a quarter of the market.
Some of the larger credit repair companies in the US include Lexington Law, The Credit Pros, Credit Saint, and Ovation Credit Services.
Right or wrong, the credit repair industry generally has a bad reputation. In addition, the increased availability of free online providers for services such as dispute and “cease and desist” collections processing, as well as settlement assistance, has caused a slight downturn.
However, IBISWorld has forecast a slight increase in revenue in its outlook from 2022 to 2027. Of note is also that this industry, by and large, performs countercyclical to the economy. An increase in mortgage rates, for example, or higher unemployment will typically increase demand for credit repair services.
Your target market is businesses and individuals with a negative credit history looking for financing, investment, or employment.
According to research by White Shark Media, the target market for credit repair services is well-defined. It’s mostly segmented into age groups, with the 35 to 44 age bracket accounting for 40% of most likely clients. The report suggests that people younger than 24 are typically too young to have a bad credit rating – and people over 60 are likely no longer dependent on a good credit rating.
Credit ratings can also impact businesses to secure financing and achieve good financing conditions. A good credit rating is especially crucial for start-ups and small businesses.
Starting a credit repair business can be an incredibly rewarding experience, but it’s important to make sure you’re prepared for the challenges ahead. Use this checklist to help get your business off on the right foot.
Step 1: Write a Business Plan
A business plan is an essential tool for any business, and a credit repair business is no exception. A well-crafted business plan can be used to get financing, create a marketing strategy, and establish realistic goals and objectives. Additionally, a business plan can serve as a valuable roadmap, helping you to keep your business on track as it grows and evolves.
Even if you don’t intend to seek funding or partners, a business plan can still be a helpful tool for clarifying your thoughts and keeping your business organized.
Related: How to write a business plan
Step 2: Name the Business
When it comes to starting a credit repair business, choosing an appropriate name is important. The name should be easy to remember, it should reflect the type of services offered, and it should convey a sense of professionalism. Additionally, the name should be unique enough to stand out from the competition. With a little creativity and effort, it is possible to come up with an effective name for a window cleaning business.
Step 3: Form a Business Entity
A business entity (also referred to as a legal entity or business structure) refers to how a business is legally organized to operate. There are four primary business structures to choose from, which include the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.
When deciding on which business entity is best for a credit repair business, it normally comes down to the sole proprietorship and Limited Liability Company.
A partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay.
The corporation can be a good choice to minimize liability risk because it separates the business assets from the owner’s assets. If the corporation is sued or certain business debts can’t be paid back, the business owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.
That leaves the sole proprietorship and LLC.
The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is that the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.
Related: Guide to forming your LLC
Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.
Some popular LLC formation services include:
IncFile - $0 plus state fees & free registered agent for 1 year!
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Step 4: Select a Location
Choosing the best location for a credit repair business will vary depending on the clients you plan to serve. A business focusing on the local community will need a different location than one that operates solely online.
The ideal location for a credit repair business that focuses on the community is one that is located close to a high concentration of people with bad credit or low incomes.
Even if the location isn’t important, you will need a place to store company vehicles, tools, and equipment. If you plan to work out of your home, be sure there aren’t any restrictions on doing so.
Step 5: Apply for Business Licenses and Permits
There is no specific licensing to operate a credit repair business, however, some states make it difficult to start. In Georgia for instance, a credit repair company must be a 501(c)(3) non-profit or a licensed attorney.
There are also a few laws that a credit repair business must consider. At the federal level, there is the Credit Repair Organizations Act (CROA), which prohibits a credit restoration company from charging upfront fees before starting to perform any work. Additionally, states have additional laws regarding providing credit repair services.
Last, there will be general business licenses to apply for, which vary depending on the location of the business.
Related: Common business licenses, permits, and registrations by state
Step 6: Find Financing
Fortunately, the cost to start a credit repair business can be affordable, however, if funding is needed, there are a few options.
One common option is to take out a small business loan. This can give you the cash you need to get your business off the ground, but it will also come with interest payments and other costs.
Another option is to seek out investors. This can be a more difficult route, but it can provide you with the capital you need without incurring debt.
Whichever path you choose, make sure you do your research and put together a solid business plan before asking for money. With a little effort, you should be able to find the financing you need to get your credit repair business up and running.
Step 7: Open a Business Bank Account
Keeping your small business and personal finances in separate bank accounts is important to track the income and expenses of your business and identify trends.
First, research which bank or credit union is right for your business. Consider factors like fees, location, and customer service. Once you’ve chosen a bank, visit their website or give them a call to learn how to open a business account.
When you’re ready to open your account, you’ll need to provide some basic information about your business, as well as your Social Security number or Employer Identification Number. You may also be required to deposit a minimum amount of money into the account.
Many banks offer free business checking accounts, so be sure to find a cost-effective option for your business.
Step 8: Get your Marketing Plan in Place
When it comes to marketing a credit repair business, there are a few key strategies that you should keep in mind.
First, it’s important to understand your target audience. Are you targeting individuals with bad credit? Or are you targeting businesses that may be looking for help in managing their finances? Once you’ve identified your target market, you can begin to develop a marketing strategy.
When creating a marketing strategy, it’s important to remember that your potential customers are likely to be feeling overwhelmed and stressed out by their financial situation. As such, your marketing materials should convey a sense of hope and empowerment, stressing the fact that your business can help them get back on track.
Your marketing may involve creating educational content (such as blog posts or infographics) that helps consumers understand the credit repair process. You may also want to consider partnering with other businesses in the financial industry, such as banks, car dealers, mortgage brokers, or accounting firms. By collaborating with other businesses, you can help build trust and credibility with your target audience. Ultimately, by taking the time to develop a well-rounded marketing strategy, you can set your credit repair business up for success.
Also, don’t forget the importance of online marketing. In today’s digital age, potential customers are likely to start their search for a credit repair business online. As such, you’ll need to make sure that your website has a good domain name and is designed with search engine optimization (SEO) in mind and that you’re active on social media platforms like Facebook and Instagram. By following these simple tips, you’ll be well on your way to successfully marketing your credit repair business.
Related: Low-cost ideas to market a new business
Every business is going to need a logo. Make a professional logo in no time with the free logo makers from BrandCrowd and Canva.
Step 9: Get Business Insurance
When starting a credit repair business, it’s important to make sure you have the right insurance in place to protect your business. The type of insurance you’ll need will depend on the size and scope of your business, but there are some basic types of coverage that all credit repair businesses should consider.
First, most states require credit repair businesses to obtain a Credit Repair Surety Bond, which is a type of insurance that bond protects customers in the event that the credit repair business doesn’t follow the proper state laws.
Professional liability insurance is a type of coverage for credit repair businesses. Professional liability insurance, also known as Errors and Omissions insurance, can help to cover the costs of legal defense in the event that a client alleges that the credit repair business did not live up to its promises.
Finally, don’t forget about general liability insurance. This type of coverage protects your credit repair business from claims arising from accidents that occur on your premises or from your business operations.
Step 10: Hire Employees
If employees are a part of your plan, it is important to search for some key qualities when screening potential candidates.
First, they should have experience in the financial industry. This will give them the knowledge and skills necessary to effectively help clients improve their credit scores.
Secondly, they should be well-organized and detail-oriented. This is essential in keeping track of clients’ progress and ensuring that all deadlines are met.
Finally, they should possess strong communication skills. This will be vital in dealing with clients and keeping them updated on their progress.
By taking the time to find employees with these qualities, you can ensure that your credit repair business gets off to a successful start.
Related: Hiring your first employee
Step 11: Set up an Accounting System
When you’re running a credit repair business, it’s important to have an accounting system in place to track progress and manage finances. But with so many options on the market, how do you choose the right one? Here are some key factors to look for:
First and foremost, you’ll want an accounting system that is designed specifically for credit repair businesses. This type of software will have features like client tracking, payment processing, and dispute management. While generic accounting software might offer some of these features, it’s not likely to be as comprehensive as a purpose-built solution.
Another important consideration is the ease of use. Your accounting system should be intuitive and easy to navigate, so that you can focus on running your business, not wrestling with complex software. Look for a system with a clean interface and clear instructions on how to perform various tasks.
Finally, make sure the accounting system you choose integrates with any other software you’re using in your business. This will make it easier to exchange data and avoid errors. For example, if you’re using a customer relationship management (CRM) system, look for an accounting solution that can connect to it. By taking these factors into account, you can find an accounting system that will help your credit.
Related: Setting up the accounting for your business
How much does it cost to start a credit repair business?
The barriers to entry are low in this industry. You may choose to start your own business from home. You may rent or lease offices. If you decide on the latter, your business case and budget must include leasing costs for office space, insurance, fit-out, signage, and generic overheads. Leasing and rental costs vary greatly depending on location and square footage.
Apart from these options, budget items include a surety bond, business licenses, credit repair software, ongoing fees, insurance, office equipment, and technology.
You will need to invest in marketing and an online presence. Don’t forget to set money aside for continuing education and membership in relevant professional organizations and networks.
How much money can you make with a credit repair business?
A credit repair business is a great way to make money and help people at the same time. By working to remove negative items from people’s credit reports, you can dramatically improve their financial well-being. And, with the right marketing strategies, you can attract a steady stream of clients. While there is no one-size-fits-all answer to how much money you can make with a credit repair business, most businesses generate a healthy profit.
Many startup credit repair businesses begin by providing services for their first clients at no cost. After the business is able to provide an improvement of their client’s credit scores, those happy clients provide great testimonials.
The pricing model for a credit repair business will vary depending on the client’s situation, however, it is common to provide a free consultation and then charge a monthly fee for their services. This fee may be based on the number of items on the client’s credit report or the complexity of the dispute. Some businesses may also charge a one-time setup fee. In addition, businesses may offer discounts for clients who sign up for longer-term contracts or who refer new customers. Overall, the pricing model for a credit repair business is typically flexible, allowing businesses to tailor their services to meet the needs of their clients.
Statistics are somewhat hard to come by. However, IBISWorld has noted an increase in wages as a share of revenue close to 38%. In addition, ZipRecruiter publicizes the annual income of a Credit Repair Agent as $41,277.00.
Note, though, that your income will depend on your cost structure, what you will charge clients, whether you only charge them for successful outcomes, and whether it’s a flat fee or a percentage. Therefore, a market analysis will be crucial to determine your expected costs and revenue.
Are there grants to start a credit repair business?
It’s extremely rare to find a grant to start a credit repair business. If you search for business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.
Legitimate federal grants can be found at Grants.gov, and you can check on your state’s economic development office to see if they have any grants available.
What skills are needed to run a credit repair business?
Expertise and Credentials. Although education requirements are not prescribed for this industry, a degree in business management and a solid understanding of financing, accounting, and relevant regulations will give you the knowledge and practical experience needed to help you achieve good client outcomes.
Additional certification or specialization will ensure you keep up to date with all regulatory requirements and updates. It will also increase your business’ market reach. Joining relevant networks such as the Credit Consultant Association or the National Association of Credit Services Organizations can give you a competitive edge through resources and professional advice.
Excellent Negotiation and Communication Skills. Be prepared to be a good listener but also have the ability to report back to your clients concisely and professionally.
However, a large part of your role will be communicating and negotiating with credit reporting agencies such as Equifax, Transunion, or Experian. You’ll need to understand the process of getting a negative item off a credit report and the laws and regulations supporting this.
For such matters, you’ll need good verbal skills and impeccable written skills to draft dispute letters and respond to credit report errors and other related issues.
Organized. Being organized and pragmatic are two excellent skills to have when running your credit repair business — in addition, having a system that keeps client details secure and not mixed up with one another is essential.
Be prepared to scan reports and supporting documentation to search and identify incorrect details. You will need to be methodical, focused, and have an eye for detail.
What is the NAICS code for a credit repair business?
The NAICS code for a credit repair business can fall under a few different codes such as:
– 541990 – Other Professional, Scientific, and Technical Services
– 541618 – Other Management Consulting Services
The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.
Related: What is a NAICS code?
If you are a patient and methodical person, an excellent fact-finder with a passion for finances, and looking to make a difference in people’s lives, starting a credit repair service offers a relatively easy way to becoming your own boss. You can start small, with relatively low investment, and then grow and expand your business over time.