How to Set Up a Collection Agency


A collection agency helps businesses recover their legitimate debt from past-due accounts. Businesses hire collection agencies because they can't afford the time and resources essential to go after defaulting customers. Hospitals, legal firms, retailers and any business that extends credit are potential clients for a collection agency. Business is easy to find and the income is lucrative--collection agencies usually charge a commission on recovered debt. The government has set strict operating guidelines for collection agencies.

Carry out preliminary research on the collection agency industry before starting your business. Observe how other owners operate their collection agencies. Establish connections with local debt collection business associations to learn the business. Read magazines, newsletters and books catering to the debt collection industry.

Study federal, state and local laws governing collection agency business. Familiarize yourself with the Fair Debt Collection Practices Act, which has strict rules and regulations on how you conduct your business. There are rules that dictate the right time to contact debtors, required notification procedures, information confidentiality and the extent of your representation. Discuss proper conduct with the local contacts you developed in your initial research. Seek professional guidance from a lawyer to understand federal and state laws.

Draft Articles of Incorporation for your collection agency with the state. This legality establishes your business purpose and its structure. Licensing rules vary from state to state, and locally. Contact your state and local government officials for details.

Acquire an Employer Identification Number from the Internal Revenue Service, if you plan to have paid employees. The EIN is used for employment tax reporting.

Prepare a business plan. Establish details about capital, operating strategy and marketing plans in the document. A business plan is essential if you are going to start your business on a bank loan.

Prepare office space. You can convert a portion of your home for an office or you can lease space. Equip your office with preliminary equipment, including a computer, furniture, stationery, phone, printers and fax machines, and file cabinets. Install collection software on your machine to handle your accounts.

Establish a debt collection plan, in accordance with the Fair Debt Collection Practices Act. This procedure may include initial notification to debtors through letters, followup telephone calls and certified letters that inform them of lawsuits following a failure to pay debts before deadlines.

Create separate bank accounts for your business and debtors.

Develop promotion materials such as brochures and business cards, and distribute them to local companies.

Tips & Warnings

  • Use legal guidance when required.
  • Violation of laws can result in liability.

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