Michelle Dunn, author of Starting a Collection Agency: How To Make Money Collecting Money, shares her tips about how to start a collection agency. Learn how to get started including how collection agencies work, the Fair Debt Collection Practices Act, charged-off debt, and improving collection rates. [15 min.]
Tell us a little bit about yourself and how you got started in collections?
Well, I started out as an accounts receivable clerk and where I worked the credit manager left her position and so I moved up to being the credit manager which was doing a lot more of the debt collections and managing credit that was extended for the business. I just found that I was really good at it and I enjoyed doing the work and I started doing that for many different businesses. Then I started my own collection agency from home and ran that for eight years very successfully and sold it about three years ago to be able to write books about starting a collection agency and about debt collection and credit full-time.
What is a collection agency?
A collection agency is a service that a business would use if they have customers that are maybe not paying on time or not paying at all. Maybe they’re getting some bad checks and they don’t know how to handle them, or how to get the money. You could hire a collection agency just like you hire a printer to print your business cards. You just hire a collection agency to collect money that you’re not getting from your customers.
How does the collections process typically work?
Most collections agencies work on a contingency basis so you would pay a commission on what is collected. The good thing about that is that when you pick an agency, if they don’t collect any money, you don’t have to pay them any money. You only pay if you’re getting results which is a great way to do business. They will just contact your customers and they can do this full-time all day whereas you’re trying to run a business which is why you hire them to try to collect for you. Then once a month they will just send you a statement with any money that they’ve collected less their commission.
What kind of equipment do you need to get started? What kind of investment is involved?
To really start your own collection agency you have to decide if you want to start it from home or rent office space then you would definitely need a computer, and printer, and you would want to get some information on the Fair Debt Collection Practices Act and really try to memorize that, if possible. It’s really important that you follow the Fair Debt Collection Practices Act. You want to look into how you’re going to market your business and so you’ll need a marketing plan. If you don’t have available funds to start your business right now, you may need a business plan where you have to go to a bank to get a loan to start your agency. You can even buy different types of debt collection software, though when I started my agency I just kept a manual file. You can do it that way, or you can use office programs like Access or Excel until your agency grows too big and you need a more automated system.
You talked a little about the Fair Debt Collection Practices Act. What do you need to know when writing letters or making phone calls? Are there certain rules you have to follow to stay within the law?
Yes, absolutely. The Fair Debt Collection Practices Act outlines all of those rules and it outlines all of the rules regarding letters and contacting debtors whether it’s by phone or in person. There are different laws that you have to follow when you’re doing each of the things and they’re all different. In addition to that, depending on what state you’re in, your state may also have additional laws you have to follow in regards to sending out letters to debtors and making phone calls, so you’ll also want to research your particular state and the states you’ll be collecting in and make sure that you’re doing everything those states want you to do as well, as well as what the federal laws want you to do.
What kinds of companies hire a collection agency?
Mostly it is people who extend credit to anyone, like an oil company that may approve someone for credit and then they sell them an oil tank and for some reason they’re not paying. Or a company that gives out credit cards, or that accepts payment by check. You can have the checks returned for insufficient funds and you still have to collect on that money. Anyone who is extending credit to customers and allowing them to purchase something – a service or product – and leave their store and pay later are the people who will use a collection agency.
What are some of the ways to find collections clients? Do you just make cold calls?
You can make cold calls. You can also look through the want ads in the newspaper and see what businesses are looking for people who do their accounts receivable or who are looking for a credit manager. If they’re looking for someone like that, they may need help collecting money and maybe they’re not already using a collection agency or if they are hiring someone new, that person may be more apt to look over your information and maybe choose you as the agency that company is going to use. You can also just join your local chamber of commerce, Rotary Club, or something like that and try to do business locally and therefore get other business owners in your town to do business with you.
You talked a little bit about taking business on a contingency basis. What percentage do collection agencies typically charge?
Most agencies charge between 18% and some go as high as 70%. The harder the debt is to collect, the more they’re going to charge you. If you give them accounts where they are over a year old or if they’re under a certain amount of money – say $50 – where it’s not worth a lot of effort. Or if you don’t have a good address, or a phone number, and the collection agency has to do some skip tracing to locate the debtor, you may be charged a higher commission than if you have a credit policy in place and you already have a new policy that at 65 days all these accounts get placed for collection because the agency can then collect these more easily for you so you will have to pay less money and they’ll be able to collect them quicker because they have good addresses and phone numbers, they’re not that old, the people know they still owe this money and it’s pretty fast. If they’re older, you have to spend a lot more time sending letters and making calls, and they’ll charge you a higher commission.
What is skip tracing?
Skip tracing is what collection agencies and some business owners do when they have someone who has skipped or left the area and they can’t locate them. If someone’s a skip you would define that as their mail is being returned, their phone is disconnected, they’ve kind of disappeared from the face of the earth, so you’re skip tracing them, you’re tracing a skip, you’re trying to find the person so you can then try to collect from them the money that they owe you.
What are the most effective tactics used to encourage someone to pay their debt?
I would say the best way to encourage someone to pay a debt is to even before they’ve incurred the debt is to have them fill out paperwork before you extend credit. Then that person knows that you’re serious about your money and you’re serious about being paid. Otherwise, you wouldn’t be collecting this information. If you have them fill out a credit application or sign a contract or some type of agreement, they will know that you’re going to use this information to collect from them if they don’t pay you. That’s the first thing. The next best way to try to collect your money is to see them in person, whether it’s where they work, at the coffee shop, in your shop, somewhere, because it’s really hard for someone to look you in the eye when they know they owe you the money and you’re asking for it and to just not pay you. And the next best way is phone calls, and most business owners don’t like to make the collection phone calls but it’s a very effective way to get paid. And the least effective is sending out collection letters and that’s what a lot of people use to try to avoid confrontation.
Can you start this part-time or do you really have to be full-time?
I think that you can start it part-time because I started my agency at home on nights and weekends while I kept my day job for many months until I had enough clients and thought I could make enough money where I could leave my full-time day job, so it’s depends on what you want do do. If you have enough money saved up or you’ve borrowed enough from your bank to start your agency and you’re able to maintain your lifestyle in the process, then you can do whatever you want. You can do it full-time or part-time.
Is there a lot of competition for collections clients?
I think that there is beginning to be. There wasn’t about ten years ago, but now there is, especially because of all the credit that’s been in the news lately. All the easy credit that’s finally ending and a lot of people are having trouble paying their bills and having foreclosures and this is creating a need for many agencies for business owners who are suddenly faced with a lot more people not being able to pay their bills than even six months ago. As time is going by, the demand is definitely growing.
Talk a little bit about purchasing charged-off debt.
You can purchase charged-off debt many different ways, and many different kinds of debt. I have purchased credit card debt in the past, but you can purchase all kinds of different debt. You go to these websites online that sell debt, you can find a lot of them on my website or the American Collectors Association advertises a lot of them in their magazine. They will show you what different kinds of debt they have and they will have different criteria. You can buy debt that’s just in your state or you can buy debt in many different states, and you can buy debts that have been cleaned out with bankruptcies and divorces or deaths, so that you’re not calling accounts where you’re not going to get any money. You can also purchase debts that have been worked by one agency to up to five or six agencies, and the more agencies that have worked it, the harder it is for you to collect that money but the cheaper you can purchase the debt for. Anything you collect, you get to keep 100% because you purchased it.
Talk about debt collection success rates. I would imagine that, as you said, older debt is a lot harder to collect.
It is a lot harder, because you spend so much time trying to find the debtor and then you begin the task of trying to collect from them and they don’t really want to hear anything about that. That’s why they charge you more for those. Agencies that have a lot of debt placed with them, their success rate is pretty good if you’re working with them on a commission basis. Like I said before, if they don’t collect anything they don’t make any money. So you want to look for an agency that offers that rather than a monthly fee because then you know you’re only paying for what you’re getting and this is all money that you would have written off. The best way to have a good success rate with your agency is to get accounts early and get accounts that still have working phone numbers and good addresses. You want to work with clients to help them create a credit policy and let them know when they should be placing accounts. If they place accounts sooner than later, you both benefit. You both get some of the money back whereas if you wait and then place it with an agency, you probably will have less chance of getting your money back and the agency doesn’t make any money either.
What if despite your best efforts they still won’t pay, can you report them to the credit bureaus?
You can absolutely report them to the credit bureaus. Most agencies do that immediately upon you placing an account with them. Business owners also have that option if they’re trying to save money and not place accounts with a collection agency. They can also become members of the credit bureaus and report good and bad payers. That’s a good tool to use if somebody has good credit, you can say “if you don’t set something up to pay this, it’s going to go on your credit report.” It doesn’t always work so well with people who already have bad credit.
Are there collection agency franchises you can buy?
There are. I do know of one. My friend David runs it. It’s called National One Credit. There’s a link to it on my website. It’s a franchise and you can start it from your home or from an office and it’s very flexible. I think it’s a good route to go if you’re not into really being an entrepreneur because it’s more work than you’ve ever done.
What are the biggest mistakes you see people make when getting into collections?
The biggest mistake people make is having no knowledge about the industry and not having ever done any debt collection work. To be a good bill collector, you really need to know the laws by heart or have it right there on your desk and you need to be able to work with people and have a lot of patience and be able to get people to understand why you’re calling them, not just be yelling at them and telling them they have to do something. When you think about it, you’re calling someone who doesn’t want to talk to you and as soon as you tell them who you are, they’re angry at you and now you have to convince them to send you money. That’s a hard thing to do.
Any other advice for someone considering starting a collection agency?
I would tell them to join local networking groups of people who are in the debt collection business. Talk to those people and ask them many questions. I would advise that maybe they subscribe to some debt collection magazines or newsletters or newsgroups, and read all the information you can about the industry before you start your collection agency.
Michelle Dunn is author of Starting a Collection Agency: How To Make Money Collecting Money and has over 18 years experience in credit and debt collection. She is the founder and president of Never Dunn Publishing, LLC, is a writer, publisher, consultant and the Editorial Advisor for Eli Financial Debt Collection Compliance Alert Newsletter. She is also the founder of Michelle Dunn’s Credit & Collections Association.