As of this writing – these are accurate. Cornerstone Support is not responsible for decisions based on this web content – please consult legal counsel before implementing based on information in this guide.
Collection agencies are an important and productive member of the economy. They serve a vital role in ensuring that payments for purchases are made, if not on-time, then within a reasonable time frame. Our economy would collapse if there was no repayment for goods and services. Collection agencies also recover money that is rightfully owed to the suppliers of the goods and services preventing an increase in prices for those who diligently pay their bills in a timely manner.
Starting a collection agency can seem like a daunting task. Many agencies who have gone through the lengthy start-up process have had tremendous success in the industry. Consumer debt is on the increase expanding the amount of debt available to collect (the most recent report from the Federal Reserve place the current amount of outstanding consumer credit at just over $4 trillion).
If you’re looking to start your own collection agency, then take note of the following steps.
Understand the Requirements that the State Has for Opening a Business
There are some fairly exhaustive and extensive requirements when it comes to opening up a business in any given state.
In fact, the lengths you must go to meet all the legal requirements will depend greatly on the state you plan on operating in — as each state has its own unique requirements that business owners must meet. Not to mention, they are always changing too (visit our blog and sign up for the Cornerstone Newsletter to keep up to date on the latest industry news).
Each new business must first register within their own state. Being a collection agency can make things a little more complicated because you must be registered and possibly licensed in every state that you collect. This means that if someone you are collecting from resides in a different state then you must be adequately licensed in that state. We will address getting licensed in other states later in the article.
Here is a list of common legal requirements that your state is likely to require:
- Registering your business
- Applying for a business license
- Obtain your employer identification number
Learn About the Laws Centered Around Debt Collection
Every business deals with money — but when your business platform is revolved entirely around collecting money, you can bet that there will be plenty of laws you must abide by.
Because each state has different rules and regulations, you’ll need to do the necessary research to determine what laws to look out for. That being said, there are some federal laws that debt collection agencies must comply with.
Here are some of the laws that have authority over all debt collectors in the U.S.:
- The Gramm-Leach-Bliley Act (GLBA)
- Law enacted to control the ways that financial institutions deal with the private information of individuals
- The Telephone Consumer Protection Act (TCPA)
- This law governs the conduct of telephone solicitations
- The Health Insurance Portability and Accountability Act (HIPAA)
- Allows healthcare facilities, insurance companies, and other healthcare providers to disclose some of a patient’s information to a collection agency
- The Fair Credit Reporting Act (FCRA)
- Law that regulates the collection of consumers’ credit information and access to their credit reports.
- The Fair Debt Collection Practices Act (FDCPA)
- Perhaps the most important of all the acts listed, due to its direct effect on how agencies can collect debt. This law limits the behavior of third-party debt collectors that are collecting debt on behalf of another person or entity. It restricts the means and methods by which collectors can contact debtors — as well as the time of day and number of times contact can be made. If the FDCPA is violated, a suit may be brought within one year against the debt collection company and the individual debt collector for damages and attorney fees.
If you want to find success with your collection agency, then you need to make sure you understand both the state and federal laws. Negligence is no excuse when it comes to being reprimanded for not following these laws.
Plan Out Your Expenses and Purchase the Necessary Equipment
One problem that many new business owners (regardless of the industry) are constantly making is not understanding the necessary capital needed to make it through the start-up phase. This can provide some headaches early on because even if you are able to properly attain all the licenses and meet all the legal requirements, but find out that you don’t have enough funds to even get off the ground, well, then you’ll be in trouble.
In order to hit the ground running, you need to plan out both capital and operating expenses for the first two to three years (some will say the first one to two years, but it’s better to plan a little further out into the future to ensure you have given yourself a chance to succeed).
For starters, you’ll need your basic office supplies, internet, computers, phones, in addition to salaries and other employee expenses.
You should also factor in the cost of marketing or capital to secure a client or purchase an initial portfolio of debt to collect, in addition to the costs of registering your business and acquiring the necessary collection agency licenses and bonds. These costs will vary depending on the number of states you plan on collecting in. (Remember you must be licensed in the states you plan to contact debtors and not just the state you maintain a physical presence.)
Obtain Your Collection Agency Bond and Debt Collection License
While the process will vary from state to state, on a macro level, here are the following steps that must be taken to receive a collection agency bond and license:
1.Assign a registered agent/agent of record – A key point to remember here is that you are required to have a registered agent in every state in which you have obtained a Certificate of Authority. Just because you are registered in one state doesn’t mean you are registered in another.
The registered agent is wholly responsible for receiving important legal and tax documents, including but not limited to franchise tax forms, annual report forms, and a notice of litigation (service of process).
2. Obtain Your Certificate of Authority – Getting a certificate of authority is the next step and comes right before acquiring your bond. The certificate outlines all the important information of your business, including the official name, owners’ names, legal status (limited liability company, corporation, limited partnership, etc.) The certificate is acquired at the Secretary of State level and allows you to actually conduct your business.
3. Obtain a collection agency bond – As part of the licensing process, there are some states that require you to first obtain a collection agency bond as part of the licensing process.
The collection agency bond is designed primarily to protect the creditor. Collection Agencies typically collect monies on a third party basis and are paid a contingent fee based on the monies actually collected. The collection agency bonds can be “called” in the event the agency collects client monies but fails to remit the appropriate funds.
*Please note that most underwriters will not write bonds for offshore entities without posting some level of collateral.
4. Obtain a debt collection license – Once you’ve successfully acquired a certificate of authority and a collection agency bond (if the state requires it), then you are now ready to apply for a debt collection license in a given state.
The information you’ll need to provide while filling out the application for a debt collection license will vary quite a bit from state to state. That being said, all states require some level of corporate information, financial information, and personal information on the owners and officers of the entity seeking licensure.
It should also be noted that there are some states out there that will require the collection agency seeking licensure in their state to maintain a physical office in their state. Make sure you identify whether or not this is the case early in the process to avoid setbacks.
The office’s main purpose is to allow debtors to choose the option for walk-in payments. It is also the physical location the state will use when conducting audits/investigations. The person designated by the agency to serve as the principal contact for the state licensing division in a state that requires a physical office is referred to as the “Resident Manager”.
This process can be extremely time-consuming and complex. While no two licensing projects are exactly the same, a good benchmark is to allow roughly 120 to 180 days to be fully licensed.
Don’t Get Caught Without the Proper License and Bonds — Work With Cornerstone Support Today
Choosing to outsource the process for getting the proper licenses and bonds for your collection agency isn’t just one of the options — it’s the smartest option.
With our initial licensing services, we’ll facilitate the entire licensing process from the preparation of the applications to the approval of the state license.
Our licensing renewal services will then guarantee the prompt and timely submission of renewal packages to the appropriate state department so you don’t have to worry about making sure your licenses are up-to-date.
We also employ a corporate change notifications service. As a collection agency, it’s important that corporate changes — such as your address, managers, or ownership — are reported to licensing authorities in a timely manner. This part of our licensing services ensures that you avoid any fines or penalties for failure to update these changes.
Do you have licenses you are in the process of applying for but you are unsure which states require bonds? Do you have questions about which bonds and amounts your agency needs, or how to obtain them? Contact us today for a quote, let us answer your questions, and save yourself the time and hassle of having to shop around – we’ll manage the process for you.
The Most Common Bonds We Write
- License Permit Bonds
- Contract Bonds
- Fidelity Bonds
- ERISA Bonds
- Court Bonds
- Notary Bonds
We write many more bonds than just these. If you’re interested in finding out if we can write a specific bond for you — or if you need assistance in identifying which bond you need, or if you need any help with the licensing or bond process — then reach out to Cornerstone Support today.
Our team of licensing and bond experts will help streamline the process so you don’t have to worry about making sure you have all your bases covered.
We’re looking forward to hearing from you!