How to Start a Debt Collection Agency

As US household debt continues to rise and businesses seek efficient ways to recover outstanding payments, debt collection agencies have never been more relevant — or rewarding.

That said, you should note that starting this type of business will require far more than simply making phone calls or sending notices to collect overdue payments, and you will undoubtedly need strong negotiation skills and a thorough understanding of the complex regulations that govern this industry in order to succeed.

In this comprehensive guide, we’ll walk you through all the essential steps you’ll need to take to start your own debt collection agency, from conducting market research and securing funding to developing your business plan, setting up operations, and launching your agency.

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Industry Overview

The U.S. debt collection industry — currently valued at approximately $15 billion — is projected to reach $16.7 billion by 2025 and continue growing at a moderate CAGR of 2.8% thereafter.

Over the last two decades, the industry has seen significant consolidation, with the 50 largest companies now capturing 52% of total revenues and the number of collection agencies declining from over 5,200 to approximately 3,500.

Meanwhile, the average agency’s annual earnings have risen to $4.1 million, up from approximately $2.3 million a decade ago.

These trends highlight the growing dominance of larger players and the increasing shift toward more efficient, large-scale operations, making entry into the industry increasingly challenging for new agencies.

Startup Costs

If you’re considering whether a debt collection agency is right for you, the first thing you’ll need to know is whether it’s a) affordable, and b) worth the investment. I mean, how much can you actually make running your own debt collection agency?

Well, it depends. The initial investment for a debt collection agency varies widely depending on factors such as the scale of your operations, the location of your business, and the client base you intend to serve.

We’ve included the most common startup costs to be aware of below:

• Office Space or Virtual Setup ($50 – $5,000+ Per Month): You will need to rent an office space if you choose not to operate virtually, with the exact costs varying based on the location of your business.
• Technology and Software ($1,000 – $5,000+): You will likely need a combination of customer relationship management (CRM) software, debt collection management software, and other compliance tools to efficiently handle all accounts and maintain accurate legal records.
• Marketing and Advertising ($1,000 – $5,000): You will need to allocate funds for a professional website, digital marketing campaigns, and networking efforts to establish your agency’s credibility and attract business clients seeking assistance with debt recovery.
• Compliance and Legal Costs ($1,000 – $5,000): You may need to budget for legal fees (to ensure compliance with state and federal debt collection regulations), with costs varying based on the complexity of your operations and the specific requirements of your state.
• Business Registration and Licensing ($200 – $1,000): You will need to formally register your business and obtain all required licenses, with the exact costs depending on your state and city.
• Working Capital ($10,000 – $20,000): You will need to budget for $10,000 to $20,000 in working capital, as revenue will likely remain inconsistent while you work to establish your client base and recover payments on initial accounts.

Note: Depending on your state, you may be required to obtain a surety bond as a financial guarantee that your agency will comply with state laws and regulations, with costs typically ranging from $5,000 to $50,000.

Earning Potential

The earning potential of a debt collection agency is generally considered strong, with most agencies typically operating on profit margins of 20% to 50% — or even higher — depending on their efficiency and recovery rates.

As a debt collection agency, there are two main elements that will influence your profitability: the time and effort required to find clients (which translates to acquisition costs) and the time and effort needed to collect debts for those clients (which translates to collection costs).

Simply put, the more efficiently you acquire clients and the more effectively you recover debts, the greater your potential for maximizing revenue and driving your business’s long-term profitability.

Note: Keep in mind that your commission — typically starting at a minimum of 25% of the debt collected — can increase to 50% or more for particularly challenging accounts, depending on the perceived difficulty of recovery.

7 Steps to Starting a Debt Collection Agency

In order to start a debt collection agency, you’ll need to complete the following steps:

1. Planning Your Debt Collection Agency
2. Registering Your Business
3. Securing Funding (If Applicable)
4. Finding and Securing the Right Location
5. Getting a Business Bank Account and Credit Card
6. Getting all Applicable Licenses and Permits
7. Obtaining Business Insurance

We’ve broken each one of these down in more detail below.

Still exploring your options? Check out other small business ideas.

Step 1: Plan Your Debt Collection Agency

Before diving into your debt collection agency, you’ll need to spend some time conducting thorough market research to understand where your business will fit and how it can stand out.

This will involve identifying potential clients — such as small businesses, healthcare providers, and/or community-based financial institutions with overdue accounts — and reaching out to gauge their interest in outsourcing debt recovery services, as well as understanding the commission rates they are open to accepting.

You should also research your competitors to pinpoint what services they offer, their commission structures, how they manage compliance, and what strategies they use to attract and retain clients.

This will help you evaluate the financial viability of your project, including projected revenues and expenses, as well as set realistic targets for growth and profitability.

Finding a Suitable Name

Choosing the right business name is both important and challenging.

This is because your name will need to be eye-catching, memorable, and (at least somewhat) related to your industry.

If you don’t already have a name in mind and need help, you can visit our How to Name a Business guide or use our Debt Collection Agency Name Generator tool.

If you do have a name in mind, we recommend researching the following:

• Your state’s business records
• Federal and state trademark records
• Social media platforms

You will also need to make sure that your business’s name is available as a domain — this is your website’s URL address.

Note: If you’re planning to operate a sole proprietorship, you might want to operate under a business name other than your own name — known as a “Doing Business As” (DBA) name. Keep in mind that this is not recommended for a debt collection agency.

Determining Your Niche

As part of planning your debt collection agency, you will need to determine what type of debt you will specialize in.

This is because different types of debt — such as medical bills, credit card debts, student loans, or commercial debts — come with their own unique challenges and debtor behaviors.

For example, techniques that are effective for collecting overdue medical bills might not work as well for recovering delinquent commercial loans.

Therefore, when starting out, it’s generally recommended to focus on mastering one specific niche and perfecting your processes within that field before diversifying into other types of debt collection.

Step 2: Register Your Business

One important aspect that cannot be overlooked when starting your debt collection agency is the importance of establishing a solid business foundation. While sole proprietorships and partnerships are the most common entity types for small businesses, they’re a far less stable and advantageous option than LLCs.

This is because unincorporated business structures (i.e., sole proprietorships and partnerships) expose you as an owner to personal liability for your business’s debts and legal actions, while LLCs protect you by keeping your personal assets separate from your business’s liabilities.

In practice, this means that if your debt collection agency were to face a lawsuit or incur any debts, your savings, home, and other personal assets could not be used to cover these costs. On top of this, forming your business as an LLC also helps it to appear more legitimate and trustworthy.

Note: If you’re interested in more information before getting started, we recommend having a look at our How to Start a Business guide (DIY) or our in-depth Best Business Formation Services review (for those opting for a professional service).

Step 3: Secure Funding (If Applicable)

Nearly every business, especially in the early stages, will require some level of financing to get off the ground, with the most common options available being:

• Small Business Administration (SBA) loans
• Traditional bank loans
• Private investors
• Angel investors
• Crowdfunding campaigns

That said, you should never borrow against your business without knowing exactly how much additional revenue it will generate, meaning any debt you take on should be productive debt — debt that directly contributes to growth and profitability.

In the context of a debt collection agency, securing a line of credit is generally recommended due to the inherent delays that exist between launching your business and receiving commission — which stem from the time it takes to acquire clients, engage with debtors, and successfully recover payments.

This will allow your agency to remain financially stable and continue operating smoothly while you work towards building a steady stream of revenue.

Step 4: Find and Secure the Right Location

The next step you’ll want to take is to find (and secure) the right location for your debt collection agency.

While many factors come into play, you will generally want to ensure that the location you choose:

• Projects a professional image
• Allows for the secure handling of data
• Is easily accessible to clients.

Of course, cost will always be an important consideration, and your chosen location should easily fit within your budget without overextending your financial resources.

Note: You will also need to ensure that your prospective property is zoned appropriately for a debt collection agency and complies with all applicable local and state regulations (discussed in more detail in Step 7).

Step 5: Open a Business Bank Account and Credit Card

Using dedicated business banking and credit accounts is essential when operating as a business owner; this is because when your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) can be at risk in the event your business is sued.

In business law, this is referred to as piercing your corporate veil and is a result of the fact that not having a separate business bank account can be interpreted by some courts as evidence that you are not treating your business as a separate financial entity.

As a result, you could lose your limited liability protections even if you’ve registered a separate business such as an LLC or C Corp.

There are also a variety of practical and economic benefits to this step, such as a larger access to business loans and a more legitimate look.

Getting a business credit card can also be a great idea as it can help you build your company’s credit history from the start.

Recommended: Read our Best Banks for Small Business review to find the best national bank or credit union.

Step 6: Secure All Required Licenses And Permits

The applicable licenses and permits that you’ll need will largely depend on your state and local regulations.

Even so, we’ve compiled a list of some of the common licensing regulations that you’ll likely need to satisfy in order to operate legitimately.

Collection Agency License

In almost every state, your business will be required to obtain a collection agency license in order to operate legally.

This process typically involves applying through the appropriate state regulatory agency (e.g., Department of Financial Regulation, Department of Consumer Affairs, Attorney General’s Office, etc), and paying a licensing fee.

Keep in mind that some states may require additional steps, such as obtaining a surety bond, undergoing a background check, or submitting detailed financial statements to demonstrate the stability of your business.

Trust Account Registration

As part of the licensing and permit process for your debt collection agency, you may be required to establish and register a trust account for handling collected funds on behalf of clients.

This will ensure that any money collected on behalf of clients is kept separate from your operational accounts and will typically need to be set up through an FDIC-insured bank — though the exact requirements will depend on your state and local regulations.

Zoning and Land Use Permits

Before establishing a debt collection agency, you’ll need to ensure that your location is zoned appropriately for such a facility.

Zoning regulations vary by locality and dictate the types of activities that can be conducted on a piece of land. In some areas, you may need to obtain a special use permit or a variance if the land is not already zoned for your intended use.

We recommend consulting with your local zoning authorities in order to understand the specific requirements and restrictions that will be applicable to your debt collection agency. Alternatively, you can consult with a business attorney if you want someone else to take care of this for you.

Note: You will likely also need to complete training or obtain certifications to demonstrate compliance with the Fair Debt Collection Practices Act (FDCPA). These regulations govern how debt collectors can communicate with debtors, prohibit abusive or deceptive practices, and ensure fair treatment during the debt collection process.

Step 7: Secure Business Insurance

In addition to securing the necessary permits and licenses, you will need to obtain the appropriate business insurance to protect your company’s assets from potential financial losses.

Note

Even if you form an LLC, purchasing business insurance is still a good idea. This is because an LLC structure protects your personal assets, not your business’s.

While specific coverage needs may vary based on factors such as location, size, and unique risks, there are several key types of insurance that most debt collection agencies should consider.

We’ve briefly outlined these below.

Professional Liability Insurance (Errors & Omissions)

Professional liability insurance, also known as Errors & Omissions (E&O) insurance, is particularly important for debt collection agencies as it provides protection against claims of negligence, errors, or improper conduct in the course of collecting debts.

Given the sensitive nature of debt recovery and the strict regulations governing the industry, even minor mistakes or perceived lapses in compliance can lead to lawsuits or financial losses, making this coverage essential for handling legal defense costs and settlements.

The cost for professional liability insurance varies widely but generally ranges from $1,000 to $3,000 annually for a small debt collection agency, depending on factors such as the size of the business, the services offered, and the level of coverage required.

General Liability Insurance

General liability insurance is a foundational coverage for debt collection agencies as it protects against claims of bodily injury, property damage, or personal injury that may occur during business operations.

For example, if a client slips and falls while visiting your office, or if an employee causes damage to a landlord’s property during setup or day-to-day operations, this coverage can help cover any legal fees and/or medical expenses associated with the incident.

The average cost for general liability insurance according to recent data is $42 per month, or $504 annually, though costs can vary based on your business’s specific needs and risks.

Cyber Liability Insurance

Debt collection agencies typically handle large volumes of sensitive client and debtor information, and as such, they are prime targets for cyberattacks and data breaches.

This is why cyber liability insurance is strongly recommended, as it provides financial protection and support for managing the fallout of such incidents.

This could include covering costs related to data recovery, legal fees, notifying affected parties, and offering credit monitoring services to those impacted by the breach.

The cost for cyber liability insurance will vary for a small debt collection agency, typically ranging from $500 to $2,000 annually, depending on factors such as the size of the business, the volume of sensitive data handled, and the level of coverage required.

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How to Start a Debt Collection Agency FAQs

Is owning a debt collection agency profitable?

Yes, owning a debt collection agency can be highly profitable. 

Most debt collection agencies operate with profit margins of 20% to 50%, with some achieving even higher levels of profitability though this will depend on factors such as operational efficiency and the quality of their client base.

Can anyone become a debt collector?

Yes, anyone can pursue a career in debt collection as long as they meet the applicable state licensing requirements, comply with all relevant regulations (like the FDCPA), and possess strong communication and negotiation skills to handle debt recovery professionally and ethically.

Keep in mind that you may also need to post a bond or pass a background check to meet state-specific requirements.

How do I start my own debt collection agency?

To start your own debt collection agency, you will need to conduct thorough market research, register your business, secure funding, and obtain all necessary licenses and permits required to operate legally in your state.

You will also need to decide whether you will rent an office or operate virtually, as well as obtain business insurance to protect your company’s assets.

What are three things that a debt collection agency cannot do?

Debt collection agencies cannot harass debtors, use deceptive practices, or contact individuals at inconvenient times, as outlined by the Fair Debt Collection Practices Act (FDCPA).  

In addition, debt collection agencies cannot disclose a debtor’s information to unauthorized parties or misrepresent the amount owed.