Starting a collection agency can be very profitable. With proper planning, execution and hard work, you can enjoy great success. Below you will learn the keys to launching a successful collection agency.
Importantly, a critical step in starting a collection agency is to complete your business plan. To help you out, you should download Growthink’s Ultimate Business Plan Template here.
Download our Ultimate Business Plan Template here
The first step to starting a collection agency is to choose your business’ name.
This is a very important choice since your company name is your brand and will last for the lifetime of your business. Ideally you choose a name that is meaningful and memorable. Here are some tips for choosing a name for your own debt collection agency:
One of the most important steps in starting a debt collection agency is to develop your business plan. The process of creating your plan ensures that you fully understand your market and your business strategy. The plan also provides you with a roadmap to follow and if needed, to present to funding sources to raise capital for your business.
Your business plan should include the following sections:
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Next you need to choose a legal structure for your collection agency and register it and your business name with the Secretary of State in each state where you operate your business.
Below are the five most common legal structures:
A sole proprietorship is a business entity in which the owner of the collection agency and the business are the same legal person. The owner of a sole proprietorship is responsible for all debts and obligations of the business. There are no formalities required to establish a sole proprietorship, and it is easy to set up and operate. The main advantage of a sole proprietorship is that it is simple and inexpensive to establish. The main disadvantage is that the owner is liable for all debts and obligations of the business.
A partnership is a legal structure that is popular among small businesses. It is an agreement between two or more people who want to start a collection agency together. The partners share in the profits and losses of the business.
The advantages of a partnership are that it is easy to set up, and the partners share in the profits and losses of the business. The disadvantages of a partnership are that the partners are jointly liable for the debts of the business, and disagreements between partners can be difficult to resolve.
A limited liability company, or LLC, is a type of business entity that provides limited liability to its owners. This means that the owners of an LLC are not personally responsible for the debts and liabilities of the business. The advantages of an LLC for a collection agency include flexibility in management, pass-through taxation (avoids double taxation as explained below), and limited personal liability. The disadvantages of an LLC include lack of availability in some states and self-employment taxes.
A C Corporation is a business entity that is separate from its owners. It has its own tax ID and can have shareholders. The main advantage of a C Corporation for a collection agency is that it offers limited liability to its owners. This means that the owners are not personally responsible for the debts and liabilities of the business. The disadvantage is that C Corporations are subject to double taxation. This means that the corporation pays taxes on its profits, and the shareholders also pay taxes on their dividends.
An S Corporation is a type of corporation that provides its owners with limited liability protection and allows them to pass their business income through to their personal income tax returns, thus avoiding double taxation. There are several limitations on S Corporations including the number of shareholders they can have among others.
Once you register your collection agency, your state will send you your official “Articles of Incorporation.” You will need this among other documentation when establishing your banking account (see below). We recommend that you consult an attorney in determining which legal structure is best suited for your company.
In developing your collection agency business plan, you might have determined that you need to raise funding to launch your business.
If so, the main sources of funding for a collection agency to consider are personal savings, family and friends, credit card financing, bank loans, crowdfunding and angel investors. Angel investors are individuals who provide capital to early-stage businesses. Angel investors typically will invest in a collection agency that they believe has high potential for growth.
When looking for a location for your collection agency, it is important to find a space that is affordable and has the potential to grow with your business. You also want to be sure that the area is well-populated, as you will want to have access to as many potential clients as possible.
Next, you need to register your business with the Internal Revenue Service (IRS) which will result in the IRS issuing you an Employer Identification Number (EIN).
Most banks will require you to have an EIN in order to open up an account. In addition, in order to hire employees, you will need an EIN since that is how the IRS tracks your payroll tax payments.
Note that if you are a sole proprietor without employees, you generally do not need to get an EIN. Rather, you would use your social security number (instead of your EIN) as your taxpayer identification number.
It is important to establish a bank account in your collection agency’s name. This process is fairly simple and involves the following steps:
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You should get a business credit card for your collection agency to help you separate personal and business expenses.
You can either apply for a business credit card through your bank or apply for one through a credit card company.
When you’re applying for a business credit card, you’ll need to provide some information about your business. This includes the name of your business, the address of your business, and the type of business you’re running. You’ll also need to provide some information about yourself, including your name, Social Security number, and date of birth.
Once you’ve been approved for a business credit card, you’ll be able to use it to make purchases for your business. You can also use it to build your credit history which could be very important in securing loans and getting credit lines for your business in the future.
The licenses and permits you need to start a collection agency will depend on your state. You will likely need a business license, a collections license, and a credit services organization license. Contact your local jurisdiction to find out about the specific licensing requirements in your state.
The type of insurance you need to operate a collection agency will depend on the type of business.
Some business insurance policies you should consider for your collection agency include:
Find an insurance agent, tell them about your business and its needs, and they will recommend policies that fit those needs.
To run a collection agency, you need some basic office equipment like a computer, internet connection, phone, and desk. You’ll also need a fax machine, postage machine, and scanner.
Marketing materials will be required to attract and retain customers to your collection agency.
The key marketing materials you will need are as follows:
The software needed to run a collection agency is a collection management system (CMS). This system helps automate the process of collecting debts. Additionally, it helps manage the workflow of the agency. A quality CMS system will also generate reports on the agency’s performance.
You are now ready to open your collection agency. If you followed the steps above, you should be in a great position to build a successful business. Below are answers to frequently asked questions that might further help you.
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No, it is relatively easy to start a debt collection company . However, there are many important factors to consider before starting such a business, including understanding the applicable debt collection laws and regulations and fair debt collection practices , developing a sound business plan, and assembling a qualified team of professionals.
There are a few things to do before starting a collection agency if you have no experience. First, research the industry and learn the laws and regulations that apply to debt collection agencies. Next, you can attend workshops or courses on how to start your own business.You may also want to reach out to industry professionals for advice. Finally, develop a business plan and create a marketing strategy.
There is no definitive answer to this question because profitability depends on many factors. However, in general, debt collection agencies that collect more significant amounts of money are more profitable than those that collect small sums of money. This is because the collection agency earns a commission on the total amount recovered, so the higher the amount, the greater the profit. Additionally, a debt collection agency operated out of a home office may be quite profitable because there is little overhead.
The cost of starting a collection agency can vary depending on the size and scope of the business. Generally, start-up costs will range from $10,000 to $20,000. This includes the costs of licensing, marketing, and equipment.
The ongoing expenses for a debt collection business include the cost of collection letters, phone calls, and legal action. Other expenses may include the cost of credit reports. Additionally, rent, utilities, and marketing costs are typical ongoing expenses for most collection businesses.
A successful debt collection agency makes money by charging a commission on the total amount of money recovered from debtors. In addition, debt collectors earn interest on any money held in their possession. Collection agencies also charge fees for their services, which can range from a flat rate to a percentage of the total amount collected.
Yes, collection agencies are a type of business that can be quite profitable. The reason for this is because they provide a necessary service. People often need help collecting money that is owed to them, and collection agencies provide this service. They also have a low overhead, which makes them even more profitable.
Collection agencies often fail because they do not have the proper systems in place to track and manage payments. This can lead to confusion and late payments, which can ultimately hurt the agency's bottom line. Additionally, many collection agencies rely on aggressive tactics to get people to pay, which can alienate customers and damage the agency's reputation.
