If you have a knack for negotiation, a sense of adventure, and a passion for business, you might find your calling in the field of repossession. With more and more consumers taking out loans to finance purchases like vehicles and even furniture, some of those borrowers will ultimately default on their loans, which means an opportunity.
This guide aims to provide an overview of the repossession business, its prospects, industry trends, and steps to get started. Read on to learn more!
A repossession, or “repo,” business specializes in recovering assets that have been used as collateral on loans where the borrower has defaulted. Most often, these are vehicles – cars, boats, motorcycles, and even airplanes – but they can also include real estate and other valuable assets.
Repossession businesses find and retrieve items and assets for lienholders after the borrower has fallen behind on the item’s loan. These businesses contract with the lien holders and are tasked with repossessing the items to be sold at auction, and the lien holder can recover at least some of their investment. Sometimes repo businesses earn a certain fee per repossession, though those fees may also vary depending on the value of the item that’s repossessed. Finding these items can be difficult, especially if the borrower has moved or left town, so a repo business may need to do some investigative work, too.
Current data is difficult to find, but according to IBIS World, the repossession services industry was valued at $2 billion and had just over 10,000 businesses in operation. The industry’s growth is closely tied to economic factors such as unemployment rates, the health of the credit market, and the overall economy.
Many trends continue to shape the repossession industry. According to Partners in Asset Recovery’s Repo Report, customers who are financing purchases are changing. Currently, 15.5 million workers in the United States have alternative arrangements for their employment, and an increasing number of workers are part of the gig economy, which holds some financial uncertainty.
Repossessions have become more complicated and have additional risk factors that business owners need to prepare for. “Breach of peace” is a significant issue in the repossession industry, and state laws require that repo agents avoid breaching the peace during repossessions. Currently, scenarios like involving law enforcement during a repossession, incorporating violence or the perception of violence, or trespassing onto a property all qualify as a breach of peace. With the increased focus on breach of peace, it’s best for repo agents to avoid interacting with the customer whenever possible.
The subprime loan sector has seen a notable increase in recent years, providing a significant impact on the repossession industry. Subprime loans are typically extended to individuals with poor credit scores, and as such, carry a higher default risk. As global economic conditions have fluctuated and income inequality has grown, more people have found themselves in the subprime category. Particularly after the economic fallout from the COVID-19 pandemic, many individuals and businesses have had to rely on subprime loans to weather financial difficulties. As these loans have a higher likelihood of default or bankruptcy, the need for repossession services has correspondingly increased.
The primary target market for a repo business includes banks, credit unions, and other financial lending institutions. These entities provide loans to individuals or businesses and use assets as collateral. When borrowers default on their loans, the lenders turn to repossession services to recover the collateral.
Here are some key segments of the target market for a repo business:
- Banks and credit unions: These are typically the largest clients of a repo business. They provide auto loans, mortgages, and other types of loans that may require repossession services in case of default.
- Auto finance companies: These companies specialize in providing financing for vehicle purchases and may require repossession services if customers fail to meet their payment obligations.
- Buy here, pay here dealerships: These auto dealerships offer in-house financing, often to individuals with poor credit. They frequently have a higher rate of loan defaults and therefore require repossession services more often.
- Title loan companies: These businesses offer loans using the borrower’s vehicle title as collateral. If the borrower defaults, the title loan company may seek repossession of the vehicle.
- Rent-to-own businesses: Rent-to-own companies, which provide rental agreements that allow the renter to own the rented item(s) after a certain period, may also need repossession services if renters fail to make payments and decide to keep the items.
- Pawn shops: Pawn shops provide loans in exchange for personal property left as collateral. If a borrower fails to repay the loan, the pawn shop might require a repossession service to retrieve the property.
- Law firms and bail bondsmen: These professionals often have clients who default on their obligations, and they may need repossession services to recover assets.
In essence, any entity that offers loans or extends credit with an asset used as collateral could be a potential client for a repo business. Understanding this target market is crucial for a repo business owner to identify potential clients and develop effective marketing strategies.
Checklist To Start A Repo Business
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If you’re thinking about starting your own repo business, there are a few things you should keep in mind. Here is a checklist of the essentials to get started.
Step 1: Research the Industry
Starting a repo business requires thorough industry knowledge to ensure legal compliance and navigate the unique challenges of asset recovery. Here are the recommended steps to gain a comprehensive understanding of the industry:
Research current events: Begin by conducting broad-based research on the repossession industry. Understand its current status, trends, and forecasts. Read industry-specific publications, follow reputable blogs, and participate in relevant online forums. This will give you a solid foundation of knowledge and keep you updated on any changes or developments.
Network with industry professionals: Reach out to people who are already in the business. They can provide invaluable insight into the day-to-day operations, challenges, and best practices. Attend industry events, trade shows, or expos, which are great platforms for networking.
Gain experience: Working in a repo business before starting your own can be very beneficial. The hands-on experience will provide you with practical knowledge that can’t be found in books.
Enroll in relevant courses: Some organizations offer courses tailored to those interested in the repossession industry. For example, the Certified Collateral Recovery Specialist (CCRS) program offered by the American Recovery Association provides in-depth knowledge of the field and could help to avoid common mistakes.
Understand the legal landscape: This is crucial to ensuring that your repo business operates within the boundaries of the law. Consult with a legal professional, or consider taking a course in law related to the repossession industry.
By doing research on the industry, you will be better prepared to venture into the repo business, but continuous learning and adaptation are key to staying successful in this ever-evolving industry.
After coming up with the idea, the next step in starting your business should be to write a clothing line 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.
Step 2: Assess the Market
Assessing the market demand is a critical first step before starting any business, including a repo business. Market research helps identify the potential customer base, understand their needs, and determine whether your proposed business can meet those needs.
It also gives you an idea of the competition and potential obstacles, thus allowing you to devise effective business strategies. Without thorough market research, you risk entering a market that’s already saturated or doesn’t have enough demand for your services.
To determine whether there’s a sufficient market for a new repo business, here are some recommendations:
Understand the local economic climate: An increase in loan defaults, which may occur during economic downturns, typically corresponds to a higher demand for repo services. Keep an eye on economic indicators such as unemployment rates and local business conditions.
Review loan data: Data on auto loans, mortgages, and other loans can provide insight into the potential need for repossession services. Look at default rates and trends over time. This information can often be found through public data sources, such as reports from the Federal Reserve or local financial regulatory bodies.
Identify potential clients: Compile a list of banks, credit unions, auto finance companies, and other potential clients in your area. Reach out to them for informal discussions about their current repossession needs and practices.
Analyze your competitors: Understand who your competitors are, what services they offer, and their pricing structures. Online research, networking events, and business directories can be good sources of this information.
Use online market research tools: There are numerous online platforms such as Google Trends and social media sites that can give you an idea of market trends and demands related to repossession services.
Conduct surveys or interviews: Reach out directly to lenders and others who might need repossession services. Ask about their satisfaction with current providers and what they would like to see improved.
Consult with industry associations: Groups like the American Recovery Association or local business groups can offer insights, data, and resources to help you understand the market.
By carefully analyzing the market, you can make an informed decision about starting your repo business. It helps you determine the potential profitability, shape your services according to the market needs, and position yourself effectively in the competitive landscape. Ultimately, market research reduces risk and enhances your chances of running a successful repo business.
Step 3: Draft a Business Plan
After learning more about the repo industry and getting feedback that a market exists in your area, the next step is to write a business plan. The business plan serves as a roadmap, detailing your business objectives and the strategies you’ll employ to achieve them. For a repo business, it’s particularly important due to the sector’s complexity, which includes the handling of sensitive client information, navigating legal concerns, and managing a fluctuating market demand based on broader economic conditions.
A robust business plan communicates your business’s viability and potential profitability, which is essential if you’re seeking funding from financial institutions. Here are a few key sections especially relevant for a repo business:
Market analysis: This section of your business plan uses the data you’ve gathered from your market research to describe your potential customer base and the current competitive landscape. For a repo business, it should highlight the local economic climate, loan data, and specific client needs. This analysis shows potential investors that there is a demand for your services and that you understand the market you’re entering.
Legal and regulatory compliance: Repo businesses must adhere to a strict legal framework, varying from state to state. This section of your business plan should detail your understanding of these laws, how you’ll ensure compliance, and your strategies for staying updated on changes in regulations. This showcases your commitment to running a legal, ethical business, which is especially important for securing funding.
Financial projections: A repo business’s earnings can be irregular, depending on fluctuations in the economy and loan defaults. You need to present a clear financial projection, including your pricing strategy, projected income, expenses, and profitability. This will indicate to investors or lenders that you have a realistic understanding of your potential earnings and a plan to ensure financial sustainability.
A well-crafted business plan does more than be a tool to get funding; it guides your decisions as you launch and grow your business, keeping you focused and strategic in your operations.
Step 4: Secure Funding
Starting a repo business involves certain upfront costs, and securing appropriate funding is an essential step. Regardless of the funding source, a business owner typically needs to invest some personal savings as a demonstration of commitment and to share in the financial risk of the operation. This is often referred to as “having skin in the game,” and it’s something that lenders and investors look for when assessing funding requests.
Here are some of the most common types of funding for a repo business in the U.S:
Personal savings: A significant number of small businesses are started with the owner’s personal savings. This provides the highest degree of control over the business, as you’re not accountable to lenders or investors. However, this also means you’re taking on all the risk yourself.
Family and friends: Many entrepreneurs get help from friends and family to finance their business. This can be a good source of funding, but it’s important to treat these arrangements professionally to avoid damaging relationships. Always put the terms of the loan in writing to avoid misunderstandings.
Bank loans: Traditional bank loans are a common source of funding. These could be general business loans, or specific types of loans such as equipment financing (which could be relevant for a repo business needing to purchase recovery vehicles and other tools). Securing a bank loan usually requires a solid credit history, a comprehensive business plan, and some personal investment in the business.
Small Business Administration (SBA) loan guarantee: The SBA provides various loan programs for small businesses. These loans are not directly from the SBA but are instead offered by lenders with a guarantee from the SBA that a portion of the loan will be repaid, reducing the risk for lenders. SBA loans have competitive rates and terms, but the application process can be rigorous.
Remember, each source of funding comes with its own set of pros and cons, and what works best will depend on your specific circumstances. It’s wise to consult with an accountant to help you navigate your options and decide on the most suitable funding strategy for your repo business.
Step 5: Register the Business
The requirements for obtaining a repossession license vary from state to state, so be sure to do your research before starting your business. Some states have very stringent requirements, while others are a little more relaxed.
Registering your repo company involves several important steps to ensure it’s legally compliant. Each state has its own laws and regulations for starting a business, so it’s crucial to research the specific requirements for your location. Below are some general steps you might need to take:
Choose a business structure: The business structure you choose impacts your legal liabilities, tax obligations, and operational complexities. Common structures include sole proprietorship, partnership, limited liability company (LLC), and corporation. For a repo business, forming an LLC is a common choice because it provides limited liability protection, meaning your personal assets are protected if the business is sued.
Related: Comparison of business structures
Business name registration: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state during the formation process.
Related: Ideas for naming a repo business
During this time, it’s also a good idea to check if the name you want is available as a web domain, even if you’re not ready to set up a website yet.
Get the required licenses and permits: Repo businesses must obtain certain licenses to operate legally. These vary by state but often include a general business license, a repossession agency license, and possibly a private investigator’s license. Depending on the state, you may be required to complete a state-approved training program and pass a licensing exam before being able to take any work.
In addition, there will also be general business requirements depending on where the business is located. A few of these include a business license, commercial driver’s license (CDL), Employer Identification Number, and Occupancy Permit.
Step 6: Set Up an Office
With the legal aspects of the business out of the way, we can begin working on setting up the office. Since repo business involves managing sensitive client information, conducting diligent asset recovery, and navigating complex regulatory compliance, a properly equipped and prepared office is essential.
Location selection: If your repo business requires a physical office, choose a location that is easily accessible, has ample space for your administrative tasks, and has enough parking for your recovery vehicles. Some businesses may start from a home office, but as your business expands, you may need to consider commercial space.
Purchasing equipment: Your office would need the usual business equipment such as computers, printers, fax machines, telephones, and office furniture. A dedicated server or reliable cloud-based storage system would be necessary for storing sensitive client information and keeping track of accounts. Also, investing in industry-specific software for tracking repossessions, managing client accounts, and dispatching recovery assignments can significantly improve your efficiency.
Setting up a secure document storage system: Repo businesses deal with a significant amount of sensitive information. You’ll need a secure system for storing physical and digital documents. This might include secure file cabinets and robust digital encryption.
Vehicle storage and maintenance area: If your office location has the space, allocate an area for vehicle storage and maintenance. Having a secure place to park your recovery vehicles and equipment when not in use is essential. Furthermore, regular maintenance of these vehicles is crucial to ensure they are always ready for recovery assignments.
IT infrastructure: Set up a reliable IT infrastructure, including a business-grade internet connection. You may also need a business email address, a company website, and possibly an intranet for internal communication.
Step 7: Create a Marketing Strategy
With the business almost ready to launch, the next step is about getting the word out to potential customers. Since a repo business operates in a specialized field, the marketing strategies must cater to its target audience’s specific needs, primarily lending institutions, car dealerships, and financial service companies.
Start by building a professional website that details your services, expertise, and commitment to ethical and efficient recovery. This is often the first touchpoint potential clients will have with your business, so make sure it communicates your value proposition clearly. Optimize your website for search engines (SEO) to improve visibility when potential clients search for repossession services in your area.
Networking is also a key part of marketing a repo business. Joining industry associations like the American Recovery Association (ARA) or attending industry-specific events can provide opportunities to meet potential clients and learn from other industry professionals.
Leverage digital marketing strategies to reach a larger audience. Paid online advertising, particularly in business directories or on industry-specific websites, can help you reach potential clients when they’re seeking repossession services. Similarly, social media might not be the primary marketing platform for a repo business, but having a presence on LinkedIn can help establish your business as professional and connect with potential customers.
Last, don’t underestimate the power of direct marketing. Communicating directly with banks, auto loan companies, car dealers, and auto rental agencies through email and/or direct mail, detailing your services and their benefits can yield good results. Remember to focus on their needs and how your services can solve their problems.
Step 9: Hire & Train Employees
Some repo businesses are owner-operated, and others hire a team. If your plans include hiring, the specific nature of the industry means that you need to have staff with specialized skills who can handle the various aspects of repossession, from investigation and recovery to administration and client relationship management.
A repo business typically hires recovery agents, who are responsible for the actual recovery of the property; skip tracers, who use a variety of methods to locate individuals who have defaulted on their loans; administrative staff, who handle the day-to-day office tasks; and client relationship managers, who maintain and build relationships with lenders and other clients.
Before hiring employees, there are several responsibilities a business owner must attend to:
Employer Identification Number (EIN): If you haven’t already done so when registering your business, you need to obtain an EIN from the IRS. This number is used for tax reporting purposes and is required when hiring employees.
State labor laws and regulations: Familiarize yourself with the labor laws and regulations in your state, including wage laws, breaks, overtime, and workplace safety. This will ensure you are in compliance and help avoid potential legal problems.
Worker’s compensation insurance: Depending on your state, you may be required to carry workers’ compensation insurance as soon as you hire your first employee. This insurance covers medical costs and wage replacement if an employee gets injured at work.
Employee eligibility verification: As an employer, you’re required to verify an employee’s eligibility to work in the U.S. This typically involves completing the I-9 form and asking for approved identification documents.
Payroll system: Set up a payroll system to manage wage payments, tax withholdings, and to provide pay stubs to your employees. There are many software options available that can simplify this process.
In summary, hiring employees for your repo business involves finding individuals with the right skill sets and meeting all legal and regulatory requirements related to employment. It’s crucial to take the time to understand these responsibilities fully before bringing your first employee on board. Your team will be the backbone of your operation, so hiring well and managing responsibly are key to your success.
Step 10: Prepare to Launch!
It’s important to note that while we have covered the common steps in getting started, each business owner may take a different path. In addition to the earlier steps, there are going to likely be some other items remaining that may require your attention:
Business insurance: Besides the basic liability insurance that we mentioned before, consider acquiring other types of insurance tailored to your industry, like wrongful repossession insurance and “on-hook” towing insurance. The latter covers the car you’re towing if it’s damaged during transport. Work with an insurance agent to ensure you have the necessary coverage to protect your business.
Bookkeeping setup: Accurate financial tracking is key to business success. Consider investing in accounting software like Wave Accounting (FREE) or Quickbooks. You might also want to engage a bookkeeper or an accountant to ensure your financial records are properly maintained.
Contracts: Establish clear, legally sound contracts for your clients. These may include service agreements that detail your terms of service, fees, and liability. Also, prepare contracts for your employees, outlining job expectations, terms of employment, and confidentiality clauses.
Open a business bank account: Separate your personal and business finances by opening a business bank account. This is important for tax purposes and gives your business a professional appearance when dealing with clients.
Invest in repo business management software: Invest in industry-specific management software to streamline operations. Options include Recovery Database Network (RDN), iRepo, or Clearplan, which offer features like assignment management, real-time updates, and reporting tools.
Credit card processing: Setting up credit card processing is important as many clients will prefer this method of payment. Work with a reliable payment processing provider like Square or Stripe to set this up.
Grand opening preparation: Plan for the launch of your business. This may involve a marketing push, reaching out to potential clients, and making sure all your systems (recovery, office operations, etc.) are ready for the first day of business.
While this list provides a comprehensive overview of the final steps, each business’s specific needs may vary, so always customize your approach based on your unique business model and local market conditions.
This material is property of StartingYourBusiness.com
Common Repo Business FAQs
How much does it cost to start a repo business?
Starting a repo business can be a significant financial undertaking. While the total cost can vary greatly depending on several factors, such as the amount of equipment and the geographic location.
On average, it could range between $40,000 and $300,000. Here’s a breakdown of some of the most common initial costs:
Business registration: Registering your business with state and local authorities includes forming your business structure (LLC, Corporation, etc.) and registering your business name. These fees can vary by state but typically range from $100 to $800.
Office and lot lease: The cost of leasing office space and a storage lot can vary greatly depending on your location. A reasonable estimate for initial lease-related costs, including security deposits, could range from $2,000 to $5,000.
Equipment costs: To operate a repo business, you’ll need towing equipment or a repo truck, office equipment, and specialized repossession software. On average, costs can range from $15,000 to $150,000 (and up) for a used tow truck, $1,000 to $3,000 for office setup, and around $500 to $1,000 for specialized software.
Licensing and permits: Licensing requirements can vary by state, but you should anticipate spending $500 to $1,000 on various licenses and permits.
Insurance: Repo businesses must carry liability insurance to protect against claims of property damage or personal injury. The initial cost of insurance can range from $2,000 to $5,000.
Marketing: Initially, you may choose to create a website, print business cards, and pay for some online advertising. Expect to spend around $1,000 to $2,000 on marketing at startup.
Legal and professional fees: You might need to hire a lawyer or accountant to help with business setup. These costs can vary but expect to spend around $1,000 to $2,000.
Operating expenses: Lastly, it’s recommended to have three to six months’ worth of operating expenses set aside as a buffer. This can cover costs like utilities, salaries, fuel, and routine vehicle maintenance. Depending on your business size, these costs can range from $10,000 to $30,000.
These are just estimates, and the actual costs can vary. Conducting a thorough budgeting exercise as part of your business planning process is useful. Remember, starting a business often involves unexpected costs, so it’s wise to budget for contingencies as well.
How profitable is a repo business?
Profitability in the repossession business varies significantly based on the scale of operations, location, and efficiency. However, there’s a basic formula that most repo businesses use to estimate their profit. They charge a flat fee per repossession, which can range anywhere from $150 to $400.
So, for a small operation that repossesses 15 cars per week, the gross revenue could range from $9,000 to $24,000 per month.
To figure profitability, one must subtract expenses to calculate the net profit.
Common monthly expenses for a small repo business could include lease payments ($2,000), insurance ($500), employee salaries (if any, $3,000 for two part-time employees), fuel and maintenance ($1,000), and office expenses ($500). This totals $7,000 in expenses per month.
Using these figures, the net profit (gross revenue minus expenses) for a small repossession business repossessing 15 cars per week could range between $2,000 and $17,000 per month.
Please note these are rough estimates, and actual profit can significantly vary based on many factors, including the number of repossessions, operational efficiency, market competition, and more. It’s also important to account for unexpected expenses and business downturns in your financial planning.
What skills are needed to run a repo business?
Starting a repossession business doesn’t require a business degree, but certain skills and experiences are valuable in starting and running this type of business.
Knowledge of repossession rules: There are different state laws to be aware of, so a business owner needs to understand these rules to avoid potentially breaking any laws or giving the lessee an advantage in court.
Knowledge of the type of product to be repossessed: The business owner should be familiar with the type of equipment that will be repossessed; if a business is repossessing boats, then a repo agent will need to be skilled in working around and driving boats.
Attention to detail: Attention to detail is highly important for identifying the appropriate items to repossess and removing the items without causing any damage.
Confident nature: Confidence is important in this industry, so repossession agents with a self-assured nature will be advantageous.
Conflict resolution skills: Even though repo agents try to avoid interacting with customers, interactions will occur, and they can get heated. A business owner with strong conflict resolution skills can minimize these conflicts and get out of these situations quickly and safely.
Clear head under pressure: Repo work can lead to high-pressure situations, so workers need to think clearly even when under pressure.
Management experience: A business owner who has previously hired, trained, and managed employees will be better prepared for these challenges when it’s time to expand their repossession company.
If you don’t have experience in the industry, it can be helpful to spend a few years as an employee of a reputable repo business to get valuable experience and insight into the repossession process and challenges of this industry. This experience will leave you better prepared to establish your business, but it also gives you a sense of whether you’ll want to work in this industry long-term before making the financial investment of starting your business.
What is the NAICS code for a repo business?
The NAICS code for a repo business is 561491.
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?
American Recovery Association