How to Start a Debt Collection Business

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If you’re looking for a relatively affordable business option that you can grow into a larger operation, then starting a debt collection business might be right for you. Debt collectors play an essential role in helping businesses and even the public get paid the money that they’re owed. While certain skills and experiences will give you an advantage in this industry, there aren’t any major barriers to getting started, like required education. If you’re determined, resourceful, and dedicated to getting the job done, you should be able to build up a list of clients and get your debt collection business started.

Business Overview

Debt collection businesses perform essential work that helps other businesses to collect the money that they are owed. Debt collection businesses may offer a variety of services, such as bill and debt collection, delinquent account collection, tax collection, repossession, and more. Some businesses specialize in one or two areas.

A debt collection business can operate in a few different ways. Most businesses work for an individual or business looking to acquire overdue payments on a debt that they’re owed. In these cases, the debt collection business may require a fee for its service, or the business may provide service in exchange for a percentage of the total debt that is owed to the client.

Alternatively, some debt collection businesses buy debt portfolios from businesses. By purchasing these portfolios at a significant discount, the debt collection business can get payments directly from the debtor amounting to the debt’s original value. In this scenario, the debt collection business makes a profit, while the business that sold off the debt still gets a partial payment and doesn’t have to wait any longer or continue to worry about the unpaid debt.

Industry Summary

According to IBIS World, the debt collection industry, which includes collecting past debts and skip tracing, has undergone recent growth. From 2015 to 2020, the industry grew by an average of 0.5% per year. As of 2020, the industry is predicted to bring in $13 billion in revenue. The industry is expected to continue to grow, and IBIS World estimates that it will increase by 1.9% in 2020.

Industry Trends

The debt collection industry evolves quickly, and business owners need to stay well-informed about the fluctuating laws and trends that can shape this industry. VoApps notes that omnichannel collection strategies are growing in their use and effectiveness. By reaching out to consumers through text messages, emails, and web portals, collectors can streamline the process and make the collection process more efficient.

Automation technology is also helping debt collection businesses to streamline their work and maximize employee efficiency. The availability of debt collection software that integrates with voice mail forwarding and texting can save businesses both money and time.

According to insideARM, the Consumer Financial Protection Bureau’s final debt collection rules are scheduled to be released in 2020. These rules will likely include caps on calls that debt collectors can perform, a safe harbor validation notice for debt collectors, and ground rules for debt collectors to use when using digital channels to communicate with consumers. The rules will also likely include consent management procedures that reflect the digital communications that are permitted.

Who is the tar​​​​get market for your debt collection business?

A debt collection business’s target market will depend on the business’ areas of specialty. Some businesses focus on certain types of debt, like student loans, commercial debt, or credit card debt. Most debt collection businesses will focus on retailers, telecommunications businesses, financial services firms, and healthcare companies with significant unpaid debt. Some businesses may also market to individuals who need to collect debt from renters and other debtors.

Skills, experience, and education useful in running a debt collection business

While you won’t need a business degree to start a debt collection business, certain skills and experiences can increase the business’s chances of success.

Debt collection experience. A business owner who has worked as a debt collector within another agency will be at an advantage when starting his or her own debt collection business.

Interpersonal skills. Debt collectors need to be able to build rapport with debtors and also be talented in reading people and negotiating. These skills can help to increase a business’ successful debt collections.

Financial and math knowledge. Having a strong understanding of math and finance basics, especially when it comes to interest rates, will be helpful in the debt collection industry.

Phone skills. A business owner who speaks well and stays calm and cool on the phone will have an advantage both in talking with debtors and in promoting the business to potential clients in need of a collection agency.

Technology skills. Familiarity with technology and troubleshooting skills are valuable in this industry, which centers around phone and computer use to find delinquent debtors.

Management experience. A business owner who has previously hired, trained, and managed staff should be better prepared to manage a collection business’ employees than someone who doesn’t have management experience.

Marketing talents. Debt collection businesses need to market to potential clients, so an owner who can do some or all of the marketing can save the business money. When an owner is actively involved in marketing, they may be better able to get new clients to sign on.

Costs to Start a D​​​​ebt Collection Business

Starting a smaller debt collection business with just a handful of employees requires minimal investment. You can start a smaller business out of an office for as little as $10,000. It’s also possible to start a business entirely on your own, hiring employees later on as the business grows. Larger businesses require more substantial investments starting closer to $30,000.

Common startup costs for a debt collection business include:

  •     Office furniture
  •     Technology equipment, including computers and collection software
  •     Website
  •     Company vehicle
  •     Signage

Steps to Starting​​​​ a Debt Collection Business

Step 1: Write your Business Plan

After coming up with the idea, the next step in starting your business should be to write a business plan.  Not only will a bank require you to have a business plan, but multiple studies have shown that a business plan helps increase the odds of starting a successful business.

How to write a business plan
Free sample business plans

Step 2: Form a Business Entity

A business entity (sometimes called a legal entity or business structure) refers to how a business is legally organized to operate. There are four primary business entities 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.

Related: Comparison of Business Entities

Step 3: Name the Business

Finding the perfect name for a business can be challenging. Not only does the name have to resonate with your customers, but it also has to be available to use.

Step 4: Select your Location

While it’s possible to start a small business out of a home office, once the business is large enough to hire employees, it’s probably time to move to a larger office. If you are working out of the home, be sure to check zoning and covenants in case you have a neighbor that doesn’t approve. Rental costs for office space will depend on the size of the space and location.

Related: Choosing a business location

Step 5: Apply for Business Licenses and Permits

A debt collection business will have licensing, such as a debt collection license at the state level, in addition to knowledge of the state and federal laws such as the Fair Debt Collection Practices Act, Gramm-Leach-Bliley Act, and Telephone Consumer Protection Act.

In addition, there are common local, state, and federal registrations for debt collection services such as an Employer Identification Number and Occupancy Permit, among others.

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 debt collection business is another.  Funding to start a debt collection business can be difficult.  In order to get a loan, the borrower(s) will need to have good credit and be able to personally invest 15-25% towards the total start-up costs.

Related: Finding the money to start a business

Step 7: Open a Business Bank Account

Keeping your business and personal finances in separate business bank and credit card accounts makes it easier to track the business’s income and expenses.

Step 8: Get your Marketing Plan in Place

Marketing is an essential ongoing activity that can help debt collection businesses to gain new clients. Marketing activities may include direct mail, print advertising, building a website, maintaining a social media presence, radio advertising, and more. Business owners who have strong networking skills may also choose to attend business networking events or seek out speaking opportunities at conferences. Marketing costs will vary depending on the type of activity being performed.

Your marketing will be much more effective as your business is operating longer and can prove the ability to collect from debtors successfully.

Related: Low-cost ideas to market a new business

Step 9: Get Insurance

A debt collection business needs several types of insurance for full coverage:

  • General liability insurance protects the business if customers are ever injured while on the business’ property. This insurance can cover expenses like legal fees and medical bills.
  • Commercial property insurance can cover the cost of damaged or destroyed equipment during an event like a fire.
  • Commercial auto insurance can help to cover expenses if a company-owned vehicle is ever involved in an accident.
  • Worker’s compensation insurance helps to cover expenses like lost wages and medical bills if an employee is ever injured while on the job.

Insurance policy cost depends on many different factors, including the business’s value and the number of employees on staff. The best way to get an accurate idea of how much to budget for insurance is to request quotes from multiple providers. When comparing the quotes, don’t just focus on the difference in the premiums. Instead, look at other factors like coverage limits, exclusions, and deductibles.

Related: Types of insurance your business may need

Step 10: Hire Employees

According to PayScale, debt collectors make an average of $35,952 per year. Salaries can range from $25,000 for entry-level employees to $90,000 for highly experienced staff.

In addition to budgeting for employee salaries, a business will also need to budget for other employee-related expenses like paid time off, health insurance contributions, and worker’s comp insurance.

Related: Hiring your first employee

Step 11: Set up an Accounting System

Setting up an accounting system for your debt collection business is critical to your business’s long-term success.

Staying on top of taxes not only keeps the business out of trouble with the government, but the numbers can be used to track and monitor trends and cash flow in the business and maximize profits.

Related: Setting up accounting for your business

How much can you potentially make owning a debt collection business?

Debt collection business profits will depend on a business’ size, business model, and the amount of the successfully collected debts. According to Optio Solutions, LLC., businesses typically collect fees averaging 25 to 50% of the debt that the business collects. As a business gains more experience and establishes a good reputation for successful collections, it can start to take on larger accounts and enjoy larger profits.

Things to consider before starting a debt collection business

Be prepared for the fact that the debt collection industry is competitive, and there are many well-established and well-known agencies already in existence. New businesses will need to overcome the challenge of gaining clients’ trust and building a roster of initial clients. There are many ways to do this, such as offering discounts and establishing referral programs, but this competition can add to the challenge of starting a new business within this industry.

The debt collection industry is a volatile one, and it can fluctuate dramatically depending on the strength of the economy. Business owners should work to build up significant reserve savings to sustain the businesses during times when income is low.

Debt collection agencies face high regulatory and compliance standards. One violation can result in lawsuits and fines in the thousands of dollars, making it imperative to have solid operating procedures and well-trained employees to minimize this risk. Debt collection agencies with revenues over $10 million face additional scrutiny and compliance requirements from the Consumer Financial Protection Bureau.

When a debtor refuses to make payments on debt, a collection business may refer the case to a lawyer and pursue legal action against the debtor. For this purpose, many debt collection businesses establish relationships with a lawyer who can help them navigate these cases and provide the business on the whole with legal guidance.


American Recovery Association, Inc.
Association of Credit and Collection Professionals
Commercial Collection Agency Association
International Association of Professional Debt Arbitrators
National Association of Credit Management

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