3 Things to Consider When Planning to Start a Collection Agency

A collection agency can be quite a profitable business, however, just like any other business it requires parallel hard and smart work to be fruitful. If you’re not completely sure how a collection agency works, it’s important to know all these details before starting up.

Collection agencies are companies that pursue payments on debts and collect these debts in the form of collection agency bonds. As a collection agency, you would purse these bonds from debtors that are not only owed by businesses but are also owed by individuals.

Depending on the scale of business you want to start, there can be multiple steps to start and make your collection agency a success.

This article will discuss the three basic considerations one should have before starting up a collection agency. These basic considerations will make sure that your business idea is well played out and that your collection agency business will be a success.

1- Knowing Well about the Agency Business Model

It is important to know all the legal and ethical implications of the business model, because the revenue model of such a business is relatively different than that of traditional businesses.

Let’s start with the agency bond which is a legal contract that binds the three parties together. The three parties in this bond will be the agency itself, the business or individual that needs to be paid, and the party that owes the debt.

Your agency will basically charge a commission for every bond that it manages to secure, and you’ll base the commission off of the difficulty from securing the bond.

So, before you even plan to start this business, you must be clear about the following points:

  • How does a debt collection agency make money; there may be some local laws which differ from other states.
  • How much (%) can you charge your customers; you can charge up to 70%, but a lot depends on who you are working with and how much effort it needs.
  • How much profit can a debt collection agency make; a little online research can give you a rough idea.
  • How can you make it more profitable; there are always ways to cut costs, bring in efficiency and grow to the next level.

2- Planning for Starting up Your Agency

Having an insight of the business model, planning will be easier. The next step is to plan on your business strategy. It is important that you have a clear plan for what your costs are going to be, who is your target market, how long will it take for you to break even, and how are you going to market your business.

For your upfront costs, you will need to look into how much it costs to rent an office space each month, what it costs for your office equipment, the cost for transportation, and the cost for your marketing tools.

You will also need to pay for the proper legal, licensure, and insurance. This can normally cost around a few thousand dollars, and the majority of states require this. Be sure to check out what the requirements are in your state of practice though because each state can have a very different set of rules.

Lastly you may want to consider joining a few associations. Some of the top associations for collection agencies include the Association of Credit and Collection Professionals or the American Recovery Association. These associations will help your collection agency look more formal and it will help you connect with future clients.  

3- Refine Your Target Market

For your main market as a collection agency, you will work with any other business that sells to another business or an individual through the extension of credit. That company’s own credit department could possibly be overwhelmed in their department at the moment, or they may not be able to adapt to the challenges of collecting a debt. This is when a collection agency such as yours will receive a call and the job of tracking down the debt that is owed.

But refining your target market can be strategic move to build better brand. For instance, you may want to deal with the digital businesses only, or you may want to cover a specific geographic location. Having a filtered niche market will surely give you a competitive advantage.

The Bottom Line:

Setting up a collecting agency requires almost similar steps as most of the business do, i.e. obtaining business name, registering a business, registering for tax, getting a bank account, setting up office and starting operations. The key difference is the business model which must be very well thought before starting up. I am sure, with the above tips in mind, you can discover a better business model of a collection agency for you.