How to Open & Operate a Financially Successful Collection Agency Business

By Kristie Lorette

With the current economic downturn, it is becoming increasingly difficult to land the career of your dreams while maintaining a stable personal life. To combat this, many individuals are beginning to open their own businesses, so as to fulfill a professional need to be successful. Although, opening a collection agency may not be at the top of your list of businesses to start, the U.S. Department of Labor reports that the median annual income for someone in the collection industry is $29,000 and, as a business owner, the earning potential increases.

This manual delivers innovative ways to streamline your business and presents new ways to make your operation run smoother and increase performance. Whether you will be operating out of your home or you are looking to buy or rent office space, this comprehensive guide can help you with a wealth of startup information.

How to Open & Operate a Financially Successful Collection Agency Business will teach you how to build your business by using low- to no-cost ways of satisfying clients, as well as ways to increase sales, and thousands of great tips and useful guidelines. More importantly, this book contains the most up-to-date information on the Fair Debt Collection Practices Act and other laws regulating the industry today. The Companion CD-ROM is not available for download with this electronic version of the book but it may be obtained separately by contacting Atlantic Publishing Group at [e-mail].

Atlantic Publishing is a small, independent publishing company based in Ocala, Florida. Founded over twenty years ago in the company president’s garage, Atlantic Publishing has grown to become a renowned resource for non-fiction books. Today, over 450 titles are in print covering subjects such as small business, healthy living, management, finance, careers, and real estate. Atlantic Publishing prides itself on producing award winning, high-quality manuals that give readers up-to-date, pertinent information, real-world examples, and case studies with expert advice. Every book has resources, contact information, and web sites of the products or companies discussed.

This Atlantic Publishing eBook was professionally written, edited, fact checked, proofed and designed. You receive the same content as the print version of this book. Over the years our books have won dozens of book awards for content, cover design and interior design including the prestigious Benjamin Franklin award for excellence in publishing. We are proud of the high quality of our books and hope you will enjoy this eBook version.

• Language: English
• Publisher: Atlantic Publishing Group Inc.
• Release date: Dec 30, 2012
• ISBN: 9781601387288

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How to Open & Operate a Financially Successful Collection Agency Business

Kristie Lorette & Emonica Dames

How to Open & Operate a Financially Successful Collection Agency Business: With Companion CD-ROM

Copyright © 2011 Atlantic Publishing Group, Inc., 1210 SW 23rd Place • Ocala, Florida 34471 • Phone [phone] • Fax [phone]

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No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher. Requests to the Publisher for permission should be sent to Atlantic Publishing Group, Inc., 1405 SW 6th Avenue, Ocala, Florida 34471.

Library of Congress Cataloging-in-Publication Data

Lorette, Kristie, 1975-

How to Open & Operate a Financially Successful Collection Agency Business: With Companion CD-ROM / by Kristie Lorette and Emonica Dames

p. cm.

Includes bibliographical references and index.

ISBN-13: 978-1-60138-283-2 (alk. paper)

ISBN-10: 1-60138-283-9 (alk. paper)

1. Collection agencies--United States--Handbooks, manuals, etc. 2. Collecting of accounts--United States--Handbooks, manuals, etc. 3. New business enterprises--United States--Management--Handbooks, manuals, etc. I. Dames, Emonica, 1978- II. Title. III. Title: How to open and operate a financially successful collection agency business.

HG3752.7.U6L67 2012

658.8’8--dc22

2010031315

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Adopt and rescue a pet from a local shelter.

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Disclaimer

The material in this book is provided for informational purposes and as a general guide to starting a collection agency only. Basic definitions of laws are provided according to the status of the laws at the time of printing; be sure to check for a change or update in laws. This book should not substitute professional and legal counsel for the development of your business.

Table of Contents

INTRODUCTION: How to Open & Operate a Financially Successful Collection Agency

CHAPTER 1: What is a Collection Agency?

CHAPTER 2: What it Takes to Start an Agency

CHAPTER 3: Deciding How to Set Up Your Agency

CHAPTER 4: Preparing to Start Your Own Agency

CHAPTER 5: The Legal Standing of Your New Business

CHAPTER 6: Accounting and Collection Software Program

CHAPTER 7: Staffing Your Agency

CHAPTER 8: Marketing — Developing Your Company’s Image

CHAPTER 9: Promoting Your Agency and Acquiring Clients

CHAPTER 10: Agency Proposals — What to Include and How to Present Them

CHAPTER 11: Laws and Regulations Governing the Industry

CHAPTER 12: Collection Methods and Communication

CHAPTER 13: Managing Customer Accounts — New and Old

CHAPTER 14: Payment Plans, Settlements, and Getting Paid

CHAPTER 15: Lawsuits, Complaints, and Legal Counsel

CHAPTER 16: The Future of your Successful Business – Franchising, Selling, or Closing

CONCLUSION

APPENDIX A: Associations & Resources

APPENDIX B: Example Debtor Excuses and Rebuttals for Overcoming Them

APPENDIX C: Most Frequently Asked Questions From Potential Agency Owners

APPENDIX D: Collection Agency Directories

APPENDIX E: Samples Collection Letters

GLOSSARY

AUTHOR BIOGRAPHIES

INTRODUCTION: How to Open & Operate a Financially Successful Collection Agency

The purpose of this book is to serve as a guide for people interested in learning more about starting and operating a collection agency. This book goes beyond the basics of how to make collection calls, write collection letters, and set up an office. It delves into the everyday responsibilities, issues, and possibilities of having your own collection agency. If you are reading this book, you probably are considering or are in the early stages of starting a collection business. You have made a very wise decision because the collection field can be a lucrative and rewarding career. Whether you have extensive collection experience or none at all, the information in this book will guide you in the right direction to either hone or develop the skills necessary to be a successful agency owner.

This book is designed to answer all the questions you have along the journey of collection business ownership. The field of collection is complicated enough on its own without having to figure out how to build a business plan or develop marketing strategies. This comprehensive guide will help you learn what you need to know to be a successful business owner, as well as affording you the opportunity to work within the collection industry.

The collection industry is one with many laws and regulations. One of the first things you have to do is study the laws and stay abreast of the changes and revisions that come about. The two most important laws and regulations are the Federal Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA). Not knowing these laws could be the death of your new business. Other laws will be discussed in Chapter 11 and throughout this book. Understanding them is crucial to the success of your business.

Debt collection agencies serve as the intermediary between a creditor and a debtor. A creditor is the company that originally extended the debt, loan, or credit account to the customer. Depending on the services your agency will offer, the collection agency might take on the responsibility of collecting outstanding debt, reporting to credit bureaus, and possibly submitting the debts to an attorney to pursue suing the debtor. Despite being highly regulated, debt collection is a multibillion-dollar industry, which illustrates how lucrative a collection business can be.

When numerous debtors default on their debt, the creditor suffers multiple losses at once. Most creditors go into business to build relationships and make money because these relationships are essential for company success. However, when creditors do not receive payments or cannot reach customers to work out payment arrangements, creditors are left with no choice but to resolve payment issues aggressively. Once the creditor has done everything they can to try to collect on the debt, creditors look to collection agencies to collect the debt on the creditor’s behalf before taking a loss on the debt and writing it off.

The 2008 economic recession has left more people and businesses in debt, which has created an environment full of opportunities for collection agencies. As the economy recovers and the unemployed become employed once again, debtors have more of a reason to collect on outstanding debts and loans. Much of the collection process will be done by experienced, reliable agencies.

Debt is everywhere. It seems as if most people and businesses have accumulated more debt than they are willing to or capable of paying back. Many have been bamboozled into bad deals, took on more than they can afford to pay, never had any intensions of paying a creditor back in the first place, or have suffered a major financial hardship, such as racking up medical bills from a major illness in the absence of health insurance. Even countries are in debt to one another. One of the wealthiest countries — the United States — has an outstanding debt of more than $14 trillion as of July 2011, with more than $600 billion of this debt owed to Japan. However, the United States is not alone in this problem; nations worldwide are struggling economically; China and India each had their fair share of economic woes in 2008 and 2009.

The History of Debt Collection

The practice of debt collection has been around in its unpolished form since ancient times. Cases date back to biblical times when people purchased items on credit by using their homes, cattle, or even themselves as collateral. When the creditor returned to collect the money, or the collateral, they expected the customer to have the funds to cover the debt. If the customer could not pay as agreed, they could very well have lost their home, cattle, and freedom, as they would have to spend days, weeks, or months working for the creditor to pay off the debt.

Of course, the collection industry changed and morphed over the years. Instead of cattle as collateral for property, consumers started putting up other material items — more modern items for the times. By the 1920s, installment plans were introduced for the first time, which permitted consumers to buy items, such as automobiles, directly from the manufacturers and dealers. This, too, changed the collection industry because there were more formal procedures and even collection businesses in place to help keep up with the modern times.

Over time, credit cards evolved, which allowed credit card holders the instant gratification of owning a product or partaking in a service now and paying for it later. The 1930s brought more products and services to the market. During this time, retailers and companies offered their own credit options, such as charge accounts. Again, this provided opportunities for instant gratification but also increased the debt level of the average American.

As the 20th Century turned into the 21st Century, consumers found themselves in even more debt than they were in during the early 1900s. However, businesses have a more difficult time recovering what is due because of all of the laws, regulations, and guidelines in place to monitor processes, ensure fair completion on debt collection, and protect consumers.

The first third-party collection companies started during the 1920s and 1930s, born from the large amount of credit accounts consumers had opened, but creditors were having a hard time collecting the money. During this time, collection professionals performed a lot of manual labor, such as writing down the details of conversations and account information on paper or note cards. Early collection professionals took collection one step further by visiting debtors at their homes. Today, not much has changed in the tactics used to collect on a debt from a client, except for going door-to-door and manual note taking. With the emergence of technology, such as the telephone and the Internet, collection professionals have the ability to correspond with debtors from the comfort of an office.

Collection companies put a lot of effort and spend a lot of money to find debtors on behalf of their clients. After locating the debtor, the accounting department can then spend time proactively working to collect on the debt.

If a company that has debtors is too small to have a collection department, it is likely the company will hire a third-party collection agency to take care of their collection. Another reason for a company to hire a third-party collection agency to collect debt is experience; collection professionals have the expertise and knowledge of the law to work with debtors amicably, effectively, and efficiently. Furthermore, a business can maintain its reputation by not pursuing the difficult and sometimes unpleasant responsibilities of making people pay what is owed, so it allows the company to remain the good guy and the collection agency the bad guy.

The Current State of Collection

People often view collection companies in a negative light, regardless of their experience. This is because they would rather start paying off their debt at their own discretion. On top of this, in the past, several collection agencies acted as aggressive, non-law-abiding bullies — with a recover funds, no matter what the cost attitude. This poor behavior might have included calling the debtor names, threatening bodily harm, and even informing a third party about the debtor’s situation. Much of this behavior is the reason the Federal Trade Commission (FTC) has enacted so many laws, such as the Fair Debt Collection Practices Act (FDCPA) to protect consumers from fraudulent dealings by collection agencies.

According to the Denver Business Journal, in 2010, the Denver-based collection agency David Faith Corp. was under investigation for allegedly withdrawing money from the bank account of a supposed debtor without his or her knowledge or permission. The FTC is in place to keep these unlawful dealings from occurring.

Fortunately, not all agencies fall under the category of bullies; most are law-abiding, responsible entities. A few tips for standing out as a top-tier, respectable agency include:

• Understand and abide by the laws that govern the industry.

• Treat consumers respectfully.

• Offer reasonable rates and treat clients well.

• Collect! Collect! Collect! Show the client the money.

• Spend the time and money to professionally market your business.

Industry outlook

According to the 2010-11 edition of the Bureau of Labor Statistics Occupational Outlook Handbook (www.bls.gov), employment for collectors is expected to grow nearly 19 percent by 2018. This is faster than the average for all other occupations. In 2008, there were 411,000 jobs available to collection professionals. Therefore, the need for new agencies is great, and you have a good chance of succeeding if you take the time to prepare yourself and your agency in advance. The outlook predicts that new jobs will be created in key industries, such as health care and financial services. Using this industry outlook, familiarize yourself with the different types of collection agencies to help you decide which one is the best for you to open and run.

Things to Keep in Mind

In your new role as an agency owner, you will have the opportunity to offer debtors a sound plan to pay off debt that includes:

• Admitting to financial mistakes and a way to resolve the problem.

• Obtaining free copies of their credit reports from www.annualcreditreport.com/cra/index.jsp, www.equifax.com/home/en_us, or any other reputable credit report website, so they have a big-picture view of their financial situations.

• Come up with a plan for lowering interest rates and making payment and settlement arrangements.

• Communicate with creditors as often as possible.

Before you delve into the option of opening your own business, be sure you research the federal and state laws that govern the collection industry. These will be discussed in Chapter 11. You do not want to find your business in trouble before it has even gotten off the ground. Operating a debt collection agency can be a financially rewarding venture, but be mindful of the mistakes and the roadblocks you may encounter as you get started. It is important to remember as you begin your journey to opening your own successful collection agency that this is simply a guide for you to follow. It is up to you, as the potential owner, to take the initiative and put to use the tips and information you learn throughout this book.

Table of Contents

CHAPTER 1: What is a Collection Agency?

Acollection agency is an independent, third party that helps a business with collecting on money owed to them by their customers, individuals, or companies. Collection agencies typically become involved in the collection process when original creditors have exhausted all other means to collect the outstanding debt from their customers. Because the business has to focus on operations, current customers, and making money, it is typically more cost effective to leverage a third-party agency to collect on the debt. Collection agencies also offer other services beyond calling on debtors, such as skip tracing, accounts receivable management, debt purchasing, and credit reporting.

Collection agencies play an important role in the business cycle and the financial