A debt collection agency is a business that collects debts on the behalf of creditors. They are an important part of our financial system as lenders and creditors are more willing to issue debt when they are confident a collection agency can help regain funds from overdue accounts. This in turn helps consumers as creditors are able to offer lower interest rates.
If you are interested in starting a debt collection business, there is a lot of important information you need to know. Both federal and state governments have established multiple laws that strictly regulate what debt collectors are allowed to do.
In this guide, we’ll show you how to start a debt collection agency.
Step 1. Determine your state requirements
The first step to starting your collection agency business is to learn your state’s requirements. Each state has a different set of steps that collection agencies need to take to launch their business. There are also unique rules agencies must follow over the course of their business.
Common requirements you can expect to meet include registering your business, getting a license, and buying a surety bond.
Step 2: Register your business
Registering your business with your state is required no matter where you live. The government agency at which you need to register your business varies depending on the state. For many, it is the Secretary of State’s office. For others, it is the Department of Revenue.
Before you register your business with the state, you will need to get a Federal Employee Identification Number from the Internal Revenue Service
Along with registering their business, collection agencies must also obtain a Certificate of Authority through the Secretary of State. This is needed to get a collection agency license in many states.
Step 3: Understand debt collection laws
Anyone that collects debts must conduct their business in accordance with several federal debt collection laws. It is important to understand the details of these different laws before you start your business. This will help ensure that you do not unknowingly violate the regulations of your license.
Below are the most important laws regarding debt collection:
- The Fair Debt Collection Practices Act (FDCPA): This law limits the actions of third-party debt collectors that collect on behalf of other parties. It specifies what methods of contact the debt collector can use and what times they contact debtors.
- The Fair Credit Reporting Act (FCRA): This law specifies how debt collectors can gather credit information from consumers.
- The Health Insurance Portability and Accountability Act (HIPAA): This law specifies what information a healthcare facility can share with a collection agency.
- The Telephone Consumer Protection Act (TCPA): This law regulates how collection agencies can solicit people over the phone.
Step 4: Get a debt collection license
Most states require debt collection agencies to get a collection agency license to operate in the state. The application process will vary depending on the state. Some of the common requirements you need to fulfill include:
- Completing a background check
- Pass a knowledge exam
- Get a collection agency surety bond
- Submit a license application
- Pay license fees
While you take the steps to legally form your business, you also want to create a business plan and estimate your startup expenses. This will help ensure you have the resources needed to make it through the first years of business.
Step 5: Obtain a surety bond
States that mandate debt collector licenses also require collection agencies to post a surety bond. The collection agency bond provides financial protection to the state and the debt collector’s clients.
The required bond amount for collection agency bonds varies depending on the state. You only need to pay a small portion of the total amount as a premium. Premium rates for collection agency bonds typically cost between 0.75% and 5% of the total bond amount. When the surety company issues your bond, they will determine your premium by evaluating your industry experience, credit history, and financial standing.
Get your collection agency bond online with EZ Surety Bonds
These are all the steps needed to start a debt collection agency. If your state requires you to obtain a surety bond, EZ Surety can offer you a free online quote for your collection agency.
We provide competitive premiums and quick turnarounds for dealers of all experience levels and financial standings. Apply online today or get in touch today to learn more.