We've collected some relevant recommendations on how to go about starting a debt collection service.
The Debt Collection Industry
With consumer debt at an all-time high, debt collection has emerged as a lucrative startup concept for the right entrepreneurs. Many lenders and financial institutions can't justify staffing their own collection departments. From a cost perspective, it makes more sense for them to outsource collections to third-party specialists.
At the same time, the debt collection industry has experienced setbacks in public perception. As families and individuals struggled to make ends meet during the recession, heavy-handed collection strategies on the part of some collectors gave the entire industry a black eye. Startup business owners need to be aware of the public perception problem and commit to conducting their business with integrity and in full legal compliance.
Debt Collection Fee Structures
Debt collectors earn income as a percentage of the debts they collect. Although there is some variance, the commission is generally 20% to 30% of collected amounts. Through a combination of mailings, phone calls and other strategies, a talented debt collection agent can quickly accumulate thousands in commissions.
Older debts tend to yield higher commission rates because the likelihood of success is decreased. Commission rates of more than 50% on old debts are fairly standard. However, it's foolish to focus all your efforts on old debts because your efforts won't yield the same outcomes as they will for loans that are only overdue by a month or two.
Alternative Business Models
As your debt collection startup grows, you may want to consider expanding into the world of factoring. Here's how it works: Instead of collecting debts for someone else, you can buy a company's accounts receivable at a highly discounted rate. Rather than collecting a commission, you then keep whatever you are able to collect. Although you may not be able to achieve 100% collection rates, the net return on factored receivables is often higher than the commission rates for standard debt collection.
How to Write a Simple Debt Collection Service Business Plan
Haven't created a business plan for your debt collection service yet? You could be in big trouble.
At Gaebler, we advise new business owners to keep your business plan simple. Even though there are certain issues your plan needs to address, business plans are fluid documents that are intended to adapt alongside your debt collection service.
As your company matures, you can circle back to your business plan to make revisions and adjustments.
Look Over Competitors
Prior to opening a debt collection service in your town, it's a good idea to determine how strong the competition is. We've provided the link below to help you find competitors nearby. Simply enter your city, state and zip code to get a list of debt collection services in your town.
If there's too much competition, it may be wise to consider starting the business in a less competitive marketplace.
Finding a Non-Competitive Business Mentor
Once you've finished assessing the competion, be sure to speak with somebody who is already in the business. If you think owners of nearby debt collection services will give you advice, think again. The last thing they want to do is help you to be a better competitor.
On the other hand, an individual who has a debt collection service in a different city can be a great learning resource for you, given that you don't compete with them in their area. Indeed, many experienced entrepreneurs enjoy offering advice to startup entrepreneurs. In my experience, you may have to call ten business owners in order to find one who is willing to share his wisdom with you.
How do you find a debt collection service founder who is willing to talk to you but doesn't live nearby?
Easy. Find them using our link below and start calling until you are successful.
Advantages of Buying an Established Debt Collection Service
It's no secret that entrepreneurs have a strong impulse to build companies from the ground up.
Yet a healthier and safer strategy may be to purchase an existing debt collection service.
Most notably, a debt collection service includes more than just assets - a brand identity and customer base come with the keys to the front door. And that's not to mention the fact that a purchase let's you avoid the trial-and-error mistakes that are common in startups.
Is Franchising the Right Option?
The odds of achieving your primary goal of being a successful business owner zoom upwards if you opt for franchising and benefit from the prior work of others and their lessons learned.
Before starting a debt collection service, a smart move is to check out whether there are good franchise opportunities available that might simplify your entering the business.
The link below gives you access to our franchise directory so you can see if there's a franchise opportunity for you. You might even find something that points you in a completely different direction.
These additional resources regarding starting a business may be of interest to you.
If you currently own a debt collection service, these resources will come in handy:
If you sell to debt collection services, this isn't the right place for you. Try these resources instead:
If you are still exploring all of your options, please browse our directory of guides below.