How to Start a Background Check Business
Landlords, financial institutions, and employers often require background checks. According to an HR.com report, 86% of US employers surveyed screened all their full-time employees in 2018. And that number has been steadily growing ever since, buoyed by an increase in the remote workforce these past few years.
If you possess strong research and analytical skills and are a clear communicator, then starting a background check service is an exciting and lucrative opportunity for you.
A background check company offers background screening to individuals, corporations, and organizations. These services will allow an employer, landlord, financial institution, organization, or individual to quickly verify that the applicant is who they say they are. Background check services typically provide pre-employment screening to investigate a job candidate’s qualifications, employment history, criminal records, credit check, and other elements within a person’s life, so the hiring company can make an informed hiring decision.
The background check services industry in the US has experienced steady growth over the past few years. According to IBISWorld, the background checking is a $4 billion industry, employing over 14,000 people. One of the main drivers of growth in the industry is a higher demand for employment background checks due to concerns over workplace safety, legal compliance, and fraud prevention. Another factor is the rising popularity of online dating, which has increased requests for personal background checks.
Some of the biggest background check companies in the US include
- Sterling: a global background screening and HR solutions company;
- HireRight: a provider of background checks and other employment screening services;
- and Accurate Background: a background screening company that offers services to employers, educational institutions, and non-profit organizations, among others.
The trend for businesses to conduct virtual hiring and offer remote work arrangements is set to continue. This leads to a greater need for digital identity verification and other online screening services. As a result, the background check services industry is poised for growth, driven by regulatory compliance, safety concerns, and the need for digital identity verification. According to IBISWorld, the industry’s revenue is projected to increase by 3.3% by 2026.
The target market for a background check service can include any organization or individual that needs to screen individuals for any given reason. Preparing a thorough market analysis will help you develop a specialization.
Potential market segments to consider are:
- Employers: Many businesses require background checks as part of their hiring process to ensure that potential employees have a clean record and are qualified for the position
- Landlords: Property owners and management companies may want to conduct background checks on potential tenants to verify their employment and rental history and creditworthiness
- Education institutions: Background checks can help screen applicants for positions such as teachers, coaches, and support staff
- Healthcare providers: Healthcare facilities may need to conduct background checks on potential employees to ensure they have the necessary qualifications and certifications and are not prohibited from working in healthcare due to criminal convictions.
- Individuals: Some people may want background checks on potential business partners, caregivers, or other individuals for personal reasons.
Checklist for Starting a Background Check Business
The background check business is a lucrative and highly rewarding field, but starting one requires careful planning. Entrepreneurs need to familiarize themselves with the legal requirements of handling personal information.
To guide you through the process, we’ve created a checklist that covers the key elements needed to start a background check business.
Step 1: Write a Business Plan
A business plan is an invaluable tool for any background check business, as it allows the owner to create an effective roadmap of the company’s operations. A good plan will have the business owner research the industry, conduct market research, decide which services to provide, marketing strategies, pricing, the investment needed, and more.
Related: How to write a business plan
Step 2: Name the Business
Naming a background check business is an important and challenging task since it is the first impression potential clients will get of your business. Your name should communicate both your purpose and professionalism. After deciding on keywords that clearly explain what kind of services you provide, consider adding a pun or play on words to make your name stand out and leave a memorable impression.
Once a list of business names has been narrowed down, it’s important to first check that the name is available to use and research available website names.
Related: Tips on naming a business
Step 3: Form a Business Entity
A business entity (also referred to as a 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 background check 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 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!
IncAuthority - $0 plus state fees & free registered agent the first year!
ZenBusiness - $49 plus state fees & free registered agent for 1 year!
Step 4: Select Your Location
Location may not be an important factor for your business as many operate out of the owner’s home. For businesses wanting a more physical local presence or will have staff, finding the right office space is important.
If you are just starting out and the cost and justification of a permanent space isn’t necessary, you can rent part-time space through shared office space, coworking space, or incubator program.
Step 5: Apply for Business Licenses and Permits
In order to legally set up a background check business, there are certain professional licenses that may be needed.
It’s important to know the regulations of employment background checks. At the federal level, there is the Fair Credit Reporting Act (FCRA), which is enforced by the Federal Trade Commission (FTC) and the Equal Employment Opportunity Commission (EEOC). There may also be state laws to be aware of as well. By not following proper procedures, your business and your client’s businesses can be liable for fines and legal action.
In addition, there are general business registrations that may be needed. A few of these may include; a business license, tax permit, and Employer Identification Number (EIN).
Related: Common business licenses, permits, and registrations by state
Step 6: Find Financing
Coming up with a good business idea and having the skills to run it are one thing, but getting the funding to start a background check business is another. Fortunately, the cost to start a new background check business is relatively low; however, funding to start a business can be difficult. Banks are typically going to want the borrower to have good credit and be able to invest 15-25% of their money towards the total start-up costs.
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.
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
Having an effective marketing strategy can help your new background check business gain visibility and bring in new clients. A successful strategy should focus on establishing trust and expertise within the field by emphasizing the importance of accuracy, reliability, and privacy.
Developing relationships with community partners, such as law enforcement and academic institutions, can boost credibility with potential customers. Additionally reaching to prospective clients with direct mail, cold calling, setting up a booth at job fairs, and networking with employers and staffing agencies, are all effective strategies to let potential customers know about your service.
Additionally, investing in paid advertising on social media or job sites will help build brand awareness quickly and effectively reach people who are already interested in background checks.
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
A background check business requires extensive knowledge of the laws and regulations that govern it and as mistakes can be made, it is important to secure reliable and adequate insurance coverage to ensure protection.
Errors & Omissions Insurance is an important type of insurance policy for a background check business. Additionally, General Liability Insurance can provide financial protection if a customer claims they experienced reputational harm due to a results report. Other forms of insurance such as Data Breach Insurance, Cyber Liability Insurance, and Worker’s Compensation Insurance may also be necessary, depending on the business’s operations and services provided.
This material is property of StartingYourBusiness.com
Background Business FAQs
How much does it cost to start a background check business?
The background check services industry is considered to have low barriers to entry. That said, it is a highly competitive industry that continues to experience significant technology changes. Therefore, it’s important to note that the expenses for a background check business can vary widely depending on your business model, the target market, location, and the competition in your area.
For example, if you start it as a home-based business, a start-up budget of around $2,000 – $4,000 will cover licenses and insurance, relevant computer software, website development, and initial marketing material.
If you decide to lease or rent an office space, you will have additional monthly rental costs and will need a budget to outfit your offices and utilities. In addition, expenses can vary greatly depending on whether your premises are located in a high-traffic area or in a business park.
Ensure you also set a budget aside for ongoing training and professional development for you and your employees to stay current with industry trends and practices.
How profitable is a background check business?
It is difficult to pinpoint the expected income from a background check business. Your income will largely depend on the volume of clients, the services you offer, and the margins you will apply to those services.
As an indication, ZipRecruiter states that the average income of a background checker is close to $40,500 annually.
Are there grants to start a background check business?
It’s extremely rare to find a grant to start a background check 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 background check business?
Credentials and professional know-how. To assure your clients that they are in good hands and all information is accurate, private, and secure, we strongly recommend NAPBS accreditation, a rigorous program. It will certify that you have a solid understanding of information security, good business practices, verification service standards, research and data standards, and legal and company compliance requirements. In addition, you will need knowledge of state and federal laws related to background checks and be familiar with the types of background checks commonly requested, such as criminal history, employment verification, and credit history checks.
US equal employment opportunities commission
Professional Background Screening Association
Good communication and customer services skills. You will need good oral and written communication skills to interact with clients, understand their requirements and provide them with concise and understandable reports to help them make decisions. In addition, excellent customer service skills, ensuring that reports are delivered on time and well presented, will help build and grow your customer base.
All data and reports suggest that the background check services industry in the USA is a significant and growing market driven by demand from a wide range of industries and clients.
If you are a meticulous person, an analytical thinker, and a good communicator, starting a background check business offers an interesting opportunity to become your own boss without the burden of hefty start-up expenses.