How to Start a Debt Collection Agency

Part 1 - How to start a Debt Collection Agency business - Background

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.

Our guide is in 3 parts:

• Part 1 - How to start a Debt Collection Agency business - Background
• Part 2 - Our planner tool to see if this idea is the right fit for you
• Part 3 - Action plan to get started

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.

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.

Part 2 - Is a Debt Collection Agency business the right fit for you?

Part 3 - Action plan to launch your Debt Collection Agency business in 90 days