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What is a Debt Collection Business
People in the UK have a combined personal debt of more than £1.8 billion. On average, in 2023 an adult in the UK has a total unsecured debt amount (debt that has no collateral backing or underlying assets, i.e. not mortgages or car loans) of nearly £4,000.
Although many people have the financial capacity to manage or repay their debt, a lot of people do not. A report from the National Audit Office (NAO) found that an estimated 8.3 million people are over-indebted, meaning their debts exceed their income and they may be unable to fulfil their debt-repaying obligations.
If unpaid debts become an issue, the creditor (the person or company to whom the money is owed) may call in the services of a debt collector. A debt collector is a person or organisation that collects debts as part of their business. They typically recover money that is owed on delinquent accounts. They collect debts when the original consumer is in arrears and has failed to repay the owed money, even with sufficient time and warnings.
Debt collectors work with consumer or business clients to help them trace missing debtors, contact debtors regarding their debt, with the aim of finding a reasonable solution for all involved (such as negotiating a settlement or creating a payment plan), and administer legal collection procedures if necessary.
Debt collectors in the UK typically work in two different ways:
The original creditor sells the debt
In many cases, the original creditor has the legal right to sell the debt to a collection agency. This usually happens if the debtor (the individual or company that owes the money) has defaulted on their payments or isn’t paying enough. The creditor will sell the debt for a reduced amount and receive a lump sum of money. The debt collector will then become the legal owner of the debt.
The debt collector collects the debt on behalf of the creditor
In this situation, the original creditor still owns the debt; however, they use a debt collection agency as a way of contacting the debtor. The debt collection business will be paid a percentage of any money they collect.
Although a debt collection business can’t legally do anything different than a creditor, they typically have the time, resources and expertise to chase a debt more efficiently.
Some ways you can chase a debt include:
- Sending letters.
- Making phone calls.
- Visiting a debtor’s home (although you cannot remove anything from the debtor’s home).
- Taking court action.
It is important to note that a debt collector is different to a bailiff (now called an enforcement agent). While an enforcement agent has the legal power to collect a debt (for example, by removing items from your home), a debt collector has no legal power to collect a debt. A debt collector cannot forcibly enter a debtor’s residence, take money from their bank account or remove any items from their home. For a difficult-to-collect debt, a debt collector can negotiate settlements for a lower amount or can agree upon a repayment plan with the debtor.
Debt collectors can collect a variety of different debts, including:
- Credit card debt.
- Car loans.
- Personal loans, including payday loans.
- Student loans.
- Unpaid utility bills.
Debt collecting is a regulated activity, meaning there are laws and regulations you must follow. Many debt collection agencies work out of an office. They may meet with their clients in person or via telephone. They can also speak to debtors they are working with over the telephone or via email, or they can visit their homes. When setting up your debt collection business, you can choose whether to act as the sole debt collector or hire employees who will also work as debt collectors for your business.
There are many different responsibilities associated with setting up and running a debt collection business, including:
- Identifying any deviations from predetermined payment plans.
- Utilising various tracing techniques and strategies to collect and collate the necessary information for each case.
- Writing letters to inform debtors of their outstanding debts and how to repay their debt.
- Making phone calls to debtors to discuss their debt.
- Explaining repayment options, including payment plans and ensuring the repayment options are realistic for the debtor.
- Negotiating repayment terms and amounts and creating newly adjusted payment plans.
- Handling any questions or complaints.
- Building trust and positive relationships with both creditors and debtors.
- Identifying vulnerable customers and escalating these cases to the relevant support teams.
- Identifying non-compliant customers and escalating these cases to the insolvency teams.
- Servicing court orders to recover outstanding cases, if necessary.
- Maintaining detailed records of each case.
- Updating account status and the database regularly.
- Accepting payments.
- Monitoring debt payment agreements and tracking repayments.
- Carrying out appropriate checks regarding non-payment before pursuing recovery action or legal intervention.
If you are thinking of starting up a debt collection business, you will need to ensure you have strong verbal and written communication skills, the ability to stay calm under pressure and good negotiation skills. You should also be able to demonstrate empathy and understanding towards individuals and businesses in debt and be able to explain financial matters, repayment options and credit services clearly to the debtor. You must also ensure you have a solid understanding of relevant legislation and court procedures.
Types of Customers
The customers of a debt collection business are typically creditors who have been unable to reclaim debt that is owed to them within the agreed-upon timeframe. Your business will usually act as an intermediary for lenders and other creditors who are owed a debt that is at least 60 days overdue.
There are many different types of lenders, creditors and businesses that use the service of a debt collector, including:
- Credit card companies.
- Loan companies (e.g. personal loans, store loans or car loans).
- Utility companies.
- Mobile phone providers.
- TV and Wi-Fi providers (e.g. Sky and Virgin).
- Student loans.
- Private parking companies.
- Construction companies (e.g. to seek payment for their work).
- Professional service providers (e.g. architects, engineers, lawyers or financial advisors that were not paid for their services).
- Wholesale businesses that import or export goods.
Typically, the creditors and lenders who are likely to use your services are:
- Businesses and lenders that have insufficient internal resources, a lack of expertise or no available time to chase debt that is owed to them.
- Businesses and lenders that have previously failed to collect debts themselves and who are finding their profits affected by outstanding debt.
- Businesses and lenders that have been unable to trace a debtor.
- Businesses and lenders that experience a customer who is disputing a debt or disputing an invoice.
Equipment You Will Need
A debt collection business has few equipment requirements, compared to many other types of businesses. The larger your business is and the more employees you hire, the more equipment you will require.
Below is a list of equipment typically required by a debt collection business.
A reliable laptop or desktop computer
You will need a high-specification, reliable laptop or computer that can handle the amount of time you will be using it each day. If you plan to work from different locations or take your computer to in-person meetings with you, you will need a laptop, rather than a desktop. Your computer will be an important tool in your debt collectors business as you will use it for tasks such as calculating debts, creating repayment plans, writing letters and maintaining your records. Ensuring your laptop is compatible with a variety of software and computer programs is essential. Your laptop will also need an updated operating system.
You will need a reliable, high-quality printer for important business tasks, such as printing letters to send to debtors, printing the documentation needed for a court case and printing your records. You could also opt for a printer that comes with an in-built scanner and fax machine.
As well as your printer, you will also need:
- High-quality printing paper.
- Black and coloured inks.
Business phones are essential, as you will be regularly speaking on the phone with your clients and with individuals and businesses whose debt you are attempting to collect. You will likely opt for landline telephones in your office, and you will need one telephone for each employee. However, you may also opt for business smartphones, which will allow you to keep in contact with clients on the go and give you constant access to your emails.
Debt collection software and computer programs
There are several different pieces of software and computer programs which can make tracking debts, locating clients and running your business much easier.
- Assess collectability: There are programs available that can help you quickly assess a debtor’s ability to repay a debt. It can help you to create a realistic repayment plan that is achievable for the debtor and results in the highest likelihood of your customers receiving the money they are owed. You can input information such as income, outgoings and other debts to find a figure that suits everyone.
- Advanced People Search: This helps you to locate the correct individual or business and find their most up-to-date contact information (e.g. name, address, phone number and email address).
- Phone number validator: This tool helps you to verify whether a contact number is valid and reachable. This can be very beneficial as you may be trying to contact a debtor using an out-of-date phone number.
- Email address validator: This works in much the same way as the phone number validator. It helps you to check whether an email address is valid, live and deliverable.
A headset with a microphone
If you do not use a headset with an attached microphone when making phone calls, the quality of your sound will be significantly impacted. Your phone or computer microphone can pick up background noises, which can be distracting to your customers and can create an echoing sound. A headset with a microphone results in higher-quality sound for your customers and enables you to hear your meetings and phone calls more effectively. A lack of background noise can also help debtors to feel more at ease, as they will not feel like they are being overheard. You can opt for a wireless or wired headset.
Reliable and high-speed Wi-Fi
Because you will be running your business from your office, you will need to ensure your Wi-Fi is reliable and high-speed. Video calls and online research require a strong and consistent connection, and you must ensure your Wi-Fi doesn’t cut out in the middle of a meeting or when creating a case. Ensure your Wi-Fi has a minimum connection speed of 20 megabytes per second (Mbps).
A website is a way for potential customers to find your business and see your experience, qualifications, skills and areas of expertise (e.g. if there is a specific type of debt collecting you specialise in). Your website can act as your online CV, showcasing some of your success stories or with information about your previous clients or projects. Ensure your website includes your contact information so potential clients can connect with you. You should also include an about page, a contact page and a blog (to demonstrate your expertise in debt collecting).
A secure storage system
You will likely amass a lot of resources and research that is vital to your business. Many of your cases may be ongoing long term, meaning you will be working with the same clients and tracking the same debt over a long time. If your laptop breaks or contracts a virus, you may lose everything you have stored on your device, including the repayment information. Investing in secure Cloud storage that is password protected and encrypted ensures everything is backed up and protected in the event of a technological issue.
A Microsoft Office subscription
You can utilise Microsoft Office for a variety of tasks, such as tracking finances in Excel, preparing documents and letters in Word and accessing Teams or OneDrive. You can also share documents with your clients through Microsoft, making it easier to communicate without having to schedule a meeting.
An email service
Setting up your own email service using your own domain may be beneficial as your business grows. A business domain can make your business seem more professional and official. Using a public email domain such as @google or @hotmail can look less professional compared to using your own business domain, for example, email@example.com. You will need to make sure your email service is fully secure and encrypted and abides by email security policies in the UK.
You will likely need to issue invoices to your clients and keep them for your own records (and for when you submit your taxes). Digital invoice software allows you to create electronic invoices, send them to your clients and store them safely.
Electronic signature tool
To create a faster and more streamlined service, you will need an electronic signature (e-sign) tool. Having this tool will save you a significant amount of time compared to physically mailing each document when a signature is required. An e-sign tool allows you to email documents that need signing to your clients and receive an electronic signature immediately. Electronic signatures are legally recognised in the UK.
Scheduling tool or software
Scheduling tools allow you and your clients to make appointments and meetings without needing to waste time trying to find an available date and time. The software links to your calendar and recognises your availability. If a client books a meeting with you via the software, you will receive an automatic confirmation email and the meeting will appear in your calendar.
You will need to furnish your office with sturdy, high-quality furniture and equipment. The amount of furniture you require will depend on the size of your office and the number of employees you hire. Ensure the furniture is an appropriate height and doesn’t require you to strain your neck or back.
Some of the furniture you may require includes:
- Office desks.
- Ergonomic office chairs.
- Secure filing cabinets.
- Shelving units or storage cabinets.
- A paper shredder.
- A clock.
- Lamps and lights.
- Long tables (for meetings).
- A kettle and coffee machine.
- Kitchen equipment for your employees’ break times (e.g. fridge, microwave).
Several pieces of stationery can be beneficial to your business and can make it easier for you to make notes and plan meetings.
Some stationery you can purchase includes:
- Pens and pencils.
- Paper and notepads.
- A diary and/or calendar.
- Post-it notes.
- Envelopes and stamps.
Business cards are an important marketing tool and can be given to new or existing clients. Your business cards should include your business name, contact information, location and the types of services you offer.
A CCTV system
Because you will be storing expensive equipment and sensitive information, CCTV can protect your business from potential break-ins and theft. CCTV can also protect your business in the event of an accident, an incident or an allegation. You can choose the specification of the equipment and how many cameras you require.
When you are creating your business plan, an important consideration you will need to make is your expected start-up costs and running costs. Calculating your expected costs allows you to determine your initial investment requirements, your pricing strategy and your profit goals.
There are multiple costs associated with setting up and running a debt collection business. Some of these costs will be one-off initial costs that you will need to pay when you are setting up your business. Other costs will be ongoing costs you will need to pay regularly – usually weekly, monthly, quarterly or annually.
Although the costs can vary, some of the typical costs you can expect are:
Your business premises
If you opt to set up an office for your debt collection business, your premises will likely be your biggest expenditure. You will need to rent your premises on a monthly or annual basis. Rental prices can vary significantly, depending on the location and the size of the premises. City centre locations and newly built premises usually have the highest rental costs. Rental costs are often calculated per square metre and can range significantly, from £500 to £15,000 per square metre annually. Your rental costs may also be higher if you are renting an already established or equipped office. Alternatively, you could opt to purchase your premises upfront or take out a mortgage.
Refurbishment and installation costs
Unless your premises previously operated as an office, you will need to refurbish or convert your premises to install the equipment you need for your business and to make your premises fit for purpose. You may be able to do much of the work yourself, although you may need to hire professionals for jobs such as improving the lighting, installing a bathroom and installing equipment and furniture. Refurbishment and installation costs can start at as little as £500, depending on the scale of work required.
Your equipment is an important purchase. Although equipment costs are not usually high for a debt collection agency, ensuring you have the correct equipment is essential. Consult the list above to determine the type of equipment you require. The cost of your equipment can vary significantly, depending on the specification of your equipment and how much equipment you need. The bigger your premises is and the more employees you hire, the more equipment you will likely require. You may opt to purchase less equipment initially and then expand your equipment as your business grows. Equipment for a debt collection business typically costs between £2,000 and £30,000.
Maintaining, repairing and replacing equipment
Repairs, maintenance and replacements are ongoing costs you will need to factor into your budget. Although some of your equipment will come with warranties or guarantees, repairs and replacements are inevitable because much of your equipment will experience frequent usage and technology, such as laptops and phones, generally only have a lifespan of a couple of years. Maintaining equipment and ensuring it is used correctly can extend its life, but potential repairs and replacements should still be factored into your budget.
Monthly and annual equipment costs and subscriptions
Your monthly and annual subscription costs could include your Wi-Fi, website, email service and your secure storage. Depending on which subscriptions you require and the specifications of the ones you choose, expect to pay between £40 and £150 per month.
Your job may require a lot of travel, as you could be visiting debtors’ homes or attending in-person meetings with your clients. You could choose to use your personal vehicle or purchase a specific vehicle to be used for business purposes. The cost of a vehicle can vary, depending on whether your purchase a new or second-hand vehicle. Prices typically start at £5,000 for a second-hand vehicle and £20,000 for a new vehicle. You also need to incorporate your vehicle running costs into your budget, including your vehicle insurance, petrol, MOT, services and the costs of any repairs. These costs can vary significantly, depending on the age and condition of your vehicle, the level of insurance you choose and the amount of travel you need to do. Typically, you can expect to pay between £50 and £200 per month.
Your business website
A business website is an essential advertising tool, as it allows potential clients to find your business online. You should ensure your website is attractive to customers and use search engine optimisation (SEO) so that your website ranks highly on search engines, such as Google. Your website will need regular monitoring, updating and upgrading. You also need to make sure your website is secure, particularly if you will be collecting any customer information or banking details. You may choose to set up and run your website yourself or hire someone to do this for you. You can expect to pay between £20 and £100 per hour for someone to set up and run your website.
You may choose to run a business where you are the sole debt collector or hire other debt collectors (particularly as your business grows). If you hire employees on a permanent basis, you will need to pay them at least the national minimum wage and account for other expenses such as holiday pay, sick pay and maternity/paternity pay.
Branding is an essential expenditure for your business. It can help you to establish your business’s identity and set you apart from your competition. Branding could include creating your business’s visual identity, a logo and your business name, and creating your business website. You can hire a professional to help you with branding or do some of the work yourself. Branding can cost between £500 and £10,000, depending on the amount of branding you require.
Advertising and marketing
To ensure your debt collection business attracts clients and creates maximum profits, you will need to invest in advertising and marketing. It is recommended that you spend between 1%-3% of your annual turnover on marketing. For example, if your annual turnover (or your desired annual turnover) is £90,000, you should spend between £900 and £2,700 on advertising and marketing. You may need to invest more money when you initially set up your business or when you are trying to grow your business.
Insurance is recommended to help protect your business, your equipment and your clients.
Some insurance coverage you could opt for includes:
- Public Liability Insurance.
- Professional Indemnity Insurance.
- Employers’ Liability Insurance (if relevant).
- Personal Accident Insurance.
- Equipment Cover.
- Portable Equipment Cover.
- Cyber and Data Risk Insurance.
- Cyber Liability Insurance.
- Business Interruption Cover.
Insurance prices can vary significantly, depending on your insurance provider and the level of coverage you require. Prices typically start at £10 per month.
Typical Pricing for Customers
Debt collection businesses typically make a profit by charging a commission percentage. This percentage can be based on:
- The original debt amount.
- The amount of money you collect.
- The type of debt.
- The age of the debt.
The commission percentage can vary significantly but typically averages at between 20% and 50%.
Alternatively, you could opt to purchase debt from the original lender or creditor. Your business will then become the legal owner of the debt, meaning your profit will be the entire amount you collect from the debtor. Although the price of buying debt can vary significantly, on average, debt collectors pay 10p for every £1 of debt they purchase. For example, if the debt you purchase is £8,000, the average purchase price will be £800.
Safely Running a Debt Collection Business
Safe practices in your debt collection business can help to protect you, your employees (if relevant), your clients and your business.
Some ways you can safely run your debt collection business are:
Protect staff when making home visits
If you or any of your employees will be visiting debtors’ homes, you must implement procedures to ensure their safety, for example:
- The location and time of the visit should be provided to a nominated person who is not performing the visit.
- The debt collector should contact the nominated person before and after each visit.
- Procedures should be in place for dealing with abusive or threatening behaviour (e.g. leave the property immediately and contact the police if necessary).
- All incidents should be recorded.
- Do not visit debtors who have previously demonstrated angry, abusive or threatening behaviour or language.
Keep detailed and accurate records
You will need to keep detailed records of every case you deal with, including recording any interactions and keeping records of payments. This is necessary in case a debtor disputes their repayment plan or if a case goes to court. You should also keep detailed records to prove that you are complying with all legal guidelines.
Adhere to an ethical code
Ensuring you implement and follow ethical practices at all times is essential. An ethical code helps to protect the well-being of your clients and ensures good practices at all times. An ethical code may be provided by your registered professional body, or you may create your own ethical code.
Conduct risk assessments
Risk assessments are only a legal requirement if your business has five or more employees. If you have fewer employees, risk assessments are recommended to ensure safe practices in your business.
When conducting risk assessments, you should:
- Identify hazards.
- Determine who could be at risk.
- Evaluate the potential risks.
- Implement safety measures.
- Record the results of the risk assessment.
- Review the risk assessment on a regular basis.
Use two-factor authentication for client records and information
All your personal and business passwords should be set up with two-factor authentication. This means you will need to prove your identity in two ways, such as with your usual password and with a code that is sent to your registered mobile number. This adds an extra layer of security to your accounts.
Obtain health and safety training
Obtaining health and safety training can ensure that you are your employees follow safe practices at all times.
Some training courses you could opt for include:
- Covid-19 Awareness.
- Workplace First Aid.
- Assessing Risk.
- Office Health and Safety.
Properly maintain and set up equipment
If you open a debt collection office, you must ensure any equipment is properly maintained, correctly set up and safe to use. You must protect yourself, your employees and your customers from accidents or injuries caused by equipment. You should also perform regular equipment inspections to ensure your equipment’s safety and help extend the lifespan of your equipment. Maintenance includes cleaning equipment regularly and checking it is functioning correctly.
Create client contracts
Although contracts are not a legal requirement, creating a legally enforceable contract with your clients ensures that any terms are laid out straight away and both parties are aware of any expectations and timeframes and the agreed-upon payment amount. Contracts also help to protect you in the event of a dispute and make your business appear more professional.
Install anti-virus software
If you use a computer or laptop in your business, anti-virus software can detect and remove malicious codes and intrusions on your computer or laptop. This can protect you and your business against viruses and malware. If your laptop becomes infected with a virus, this can cause irreparable damage to your equipment, can delete your computer’s data and cause you to lose money and business. A virus on your laptop could also be sent to your clients via email which could affect your business’s reputation. Anti-virus software should be installed on all of your devices and your Wi-Fi.
Complying with legal requirements is essential when setting up and running your business.
Some of the legal issues you should be aware of in relation to a debt collection business are:
Register as a Debt Collection Agency (DCA)
You will need to register as a debt collection agency that is legally able to act and recover debt on behalf of a creditor.
Once you have registered your business, you will need to follow the guidelines set out by:
- The Financial Conduct Authority.
- The Financial Ombudsman Service.
- The Competition and Markets Authority.
Your business may also be supervised by the above institutions.
Ensure your activities are not deemed as harassment
It is imperative that none of the actions taken by your business to recover a debt can be considered as harassment.
Some activities that are deemed acceptable include:
- Sending letters and reminders before taking any debt recovery actions.
- Arranging meetings with the debtor to create a repayment plan.
- Contacting the debtor by letter, email, text message or phone call (as long as this is not done excessively or in an abusive manner).
- Visiting a debtor’s home at a reasonable time of day.
- Proceeding with court action if the debt cannot be settled within reason.
Some recovery actions that could be deemed as harassment or abusive and are not permitted include:
- Entering a debtor’s home without consent.
- Contacting a debtor several times a day or contacting them early in the morning or late at night.
- Pursuing a debtor on social media.
- Pressuring a debtor to make payments they cannot afford or take out more credit to pay off the debt.
- Threatening a debtor verbally or physically.
- Telling someone else about a debt or passing on messages about a debt to another person, such as a neighbour or family member.
- Implying that legal action can be taken if it cannot.
- Implying that not paying the debt is a criminal offence.
Comply with the Consumer Credit Act 2006
The Consumer Credit Act is an important law that covers the majority of commercial lending in the UK. The Act sets out what creditors must do when they lend and collect money. Under this Act, you must ensure your business is fully licensed as a debt collection agency. It also limits the ways in which you can advertise your services. You must ensure you (and the creditor the debt belongs to) follow the correct procedures if a debt has defaulted.
Comply with legal requirements when managing a debt
Whether you are handling a debt on behalf of a creditor or you purchased the debt from the creditor, there are certain actions that you are not allowed to take, including:
- Providing any information that is not clear and transparent.
- Assigning a payment deadline or a repayment amount that is not realistic.
- Adding any charges or fees to the debt that were not listed in the original contract.
- Contacting the debtor’s employer, family members, neighbours or acquaintances without specific permission.
Performing any of these actions or breaching these practices could result in you losing your DCA registration.
Comply with the Financial Conduct Authority’s (FCAs) guidance for debtors who may be considered vulnerable
The FCA sets out specific rules and guidelines for dealing with debtors who may be considered vulnerable, including those living with a mental health condition. If a debtor informs you of a mental health condition, you must refer the case to a specialist team that is trained specifically in mental health. You may be asked to adhere to specific guidelines when dealing with this case, or you may be asked to write off the debt.
Comply with guidelines when taking legal action
Before you take a debtor to court, there are certain actions you must first complete including:
- Ensure payments have not been made for 60 days.
- Send a letter of demand to the debtor with the exact amount owed, detailed instructions on how to pay and a deadline by which to pay.
- Start court proceedings and give the debtor at least 14 days to respond.
You should also try to work with the debtor to try and resolve the debt without taking legal action.
Provide proof of debt
You are not able to chase or collect a debt until you have proven that the debt exists. You (or the original lender) must provide written proof that the debtor owes the money and how much money is owed. Without this proof, you cannot enforce the debt collection.
Comply with invoice or receipt guidelines
You may make it standard that you send all of your clients an e-receipt or invoice once they make a payment to your business. Even if you don’t make it standard, some clients will request receipts or invoices.
You must include certain information in any invoices you create, such as:
- The word ‘invoice’ and a unique invoice number.
- Your business name and address.
- The client’s name and address.
- A brief description of your work.
- The total you are charging the client and when the payment is due.
- The payment method.
Ensure your website complies with the guidelines
If you set up a business website, there are several guidelines you need to comply with, including:
- Privacy policies.
- Cookie legislation.
- Service descriptions.
Under the Equality Act (2010), all websites in the UK must be accessible to people with disabilities. If you set up a business website, you must make reasonable adjustments to your website to ensure it is accessible, for example, having text-only versions of each page so that they can be read by text converters.
Comply with the General Data Protection Regulations (GDPR) and the Data Protection Act (DPA)
You must comply with both pieces of legislation when storing or sharing personal information, such as your customers’ personal information, contact details and banking information. You must also apply for a Notification to Process Personal Data Licence. You will also need to apply for a licence with the Information Commissioner’s Office and renew your registration every year.
Comply with employment legislation
If you employ any debt collectors on a permanent basis, you must ensure you follow employment legislation, including the Employment Rights Act (1996) and the National Minimum Wage Act (1998). You must also comply with legislation relating to recruitment, working hours, sickness, discrimination, dismissals, and maternity or paternity pay.
Register your business
Your business must be registered with HMRC before you begin operating. You can choose to register as a sole trader or as a limited company. You will also need to register your business name and any other relevant information.
Register for self-assessment tax
This allows you to calculate and pay your own taxes each year. You will need to track your finances every month and submit any expenses as part of your tax assessment.
As part of your tax responsibilities, you must:
- Record all forms of income and expenses.
- Complete an annual self-assessment tax return.
- Register for VAT if you earn above the threshold (currently £85,000).
- Pay National Insurance contributions.
- Keep a record of your business accounts for the previous five years.
If you set up a business premises (e.g. an office) you will have additional legal requirements you must adhere to, particularly if you hire employees who also work on your premises or you host meetings on your premises.
Comply with fire regulations
You must ensure fire safety measures are implemented on-site. There are multiple fire regulations you must ensure you comply with.
- Perform a fire risk assessment.
- Comply with the Regulatory Reform (Fire Safety) Order 2005.
- Implement any necessary fire safety measures.
- Implement emergency procedures and ensure these are clearly displayed on your premises.
Comply with the Provision and Use of Work Equipment Regulations (PUWER) 1998
These regulations specify that any equipment you use in your business must be fit for purpose and maintained and inspected regularly. Health and safety risks should be minimised to an acceptable level, and you must ensure that you have the correct knowledge and training to use the equipment and that protective measures are put into place. You must also ensure the equipment is used under appropriate conditions.
Comply with the Electricity at Work Regulations (1989)
The Electricity at Work Regulations state that any workplaces that use electricals must construct electrical systems in a way that prevents danger, maintain electrical systems to ensure they are safe, ensure electrical equipment is checked by a competent person annually and conduct Portable Appliance Tests (PAT). This includes any electrical equipment such as computers, chargers and printers.
Comply with the Health and Safety at Work etc Act 1974
The Health and Safety at Work etc Act lays out the duties of all employers in the UK in relation to the health, safety and welfare of everyone in your workplace. As the business owner, you will be responsible for protecting the health and safety of your employees and any clients or visitors to your business.
Prepare a health and safety policy
The law states that every business in the UK must have a specific policy for managing health and safety. Your policy should state exactly how you will manage health and safety in your business, who is responsible for specific tasks and how and when these tasks are completed.
Positives of Owning a Debt Collection Business
Starting up a debt collection business can be rewarding in many ways.
Some of the main pros associated with this type of business are:
You can purchase debt
Having the option to purchase debt, instead of working on behalf of the creditor, can be financially rewarding.
Owning the debt can be advantageous because:
- You will have greater control over how you want to handle the debt and any negotiations.
- Your profit margins will be higher.
- You have the option to resell the debt.
Collecting debts can be highly profitable
Even if you choose to collect debts on behalf of the lender, you can still earn a significant profit. You can set your base profit margin by negotiating the percentage of each collection you will take. This gives you a set income without needing to invest the initial capital to purchase the debt. For larger debts or more complex cases, you can set a higher percentage (as high as 50%), increasing your profit margin further.
Control the entire collection process
Once a lender has engaged your services, your business will be in control of the entire collection process. This allows you to use your own strategies, handle any negotiations and ensure that there is complete compliance with any laws and regulations. Following a case from start to finish also maximises the chances of a successful repayment as you can create a positive relationship and line of communication with your clients.
With the rising cost of living and personal debt in the UK on the rise, debt collectors are constantly sought after. This should mean you will consistently have clients and your services will be in constant demand. High demand for your services also means you can charge higher prices and grow your business by hiring more debt collectors.
Specialise your business
It can be financially rewarding to specialise your business in a particular type of debt or a particular type of client, for example payday loans. This enables you to learn specialist knowledge and skills and develop your expertise, which can help you to retrieve debt more successfully. Being seen as a specialist debt collector in a particular field can help your business to be more attractive to potential clients and can allow you to charge a higher rate.
Helping your clients
Although many people may think of debt collectors negatively, for example as relentlessly trying to get money from people who can’t afford it, in actual fact, as part of your role, you can really help clients and make a positive difference in their lives. You can help create repayment plans they can afford, treat them with respect and help to protect their credit rating and long-term finances. Knowing that you have truly helped your clients can be very rewarding.
Flexibility to create your own schedule
As the business owner, you will have the flexibility to choose your workload and the number of clients you take on at one time. You can choose your own working hours and even change your schedule from day to day and week to week. Your responsibilities will likely not require you to be available from 9-5 every day. You can also take on as many or as few clients as you choose. This gives you a huge amount of freedom and flexibility.
Every day is different
Running a debt collection agency will never get boring. Every day will be different and will present new challenges and different clients. You will be handling a variety of different tasks, talking to different people and making visits. A varied working week helps to keep your job interesting.
Opportunities for growth
As your business becomes more successful, you may hire other debt collectors, allowing you to expand your client base and grow your business. Having more people working for your business allows you to take on more clients and pursue more debts, allowing you to maximise your profits. A debt collection business is highly scalable, with great opportunities for growth. Because you will already have a solid business plan, a good reputation and established practices, you can easily adapt your business model for expansion.
Client loyalty and recommendations
You can gain a lot of business and maximise your profits through client loyalty. Many lenders have multiple debts they need to chase and by creating a positive business relationship with them, you can take responsibility for their other debtors and increase your income. Lenders may also recommend your business to others who are struggling to reclaim their money or may write positive reviews, which can help you to grow your business further.
Create a positive work environment
You can create a healthy work culture and a positive work environment that can make it more enjoyable for you and your employees to come to work every day and can help you to complete work more efficiently. Other debt collectors will bring different skills, knowledge and experience to your business which can be beneficial to your business.
Unlimited income potential
The more exposure your business gains and the more debts you successfully retrieve, the more successful your business will be. As your business grows and you develop a good reputation, you will see your profits grow. You can even charge higher prices for your services and hire more staff and expand your business to increase your profits. Debt collection can have a high-income potential and your profit margins are likely to be high. With a good business plan and strategy for growth, your business could have unlimited income potential.
Be your own boss
Being your own boss gives you the opportunity to control the growth of your business, manage your own time, and gain more self-confidence and job satisfaction. Owning your own debt collection business also means that all your profits will belong to you, and you will be in control of creating your ideal business.
Negatives of Owning a Debt Collection Business
Although owning a debt collection business can be rewarding, there are some potentially negative aspects to this type of business you should be aware of:
Purchasing debt can lose you money
Although in some situations purchasing a debt can be financially rewarding, there are many situations where you could end up losing money. If a lender is willing to sell a debt, this could mean that they are not optimistic that they are likely to receive the money they are owed or they predict the process will be arduous. You could invest the initial capital to purchase the debt with little or no gains.
High start-up costs and running costs
To portray your business as being professional and legitimate and to allow you to hire debt collectors, you will likely need to run your business from an office. The costs associated with running an office and purchasing the necessary equipment, as well as the costs associated with training and paying your staff, can be high. High start-up costs and running costs can make it more difficult for your business to turn a profit.
Training new debt collectors
It can be time-consuming to train new debt collectors, particularly those with no previous experience in the industry. They will need to learn all the laws and regulations, familiarise themselves with the court process, gain the necessary financial skills and learn how to communicate and negotiate with clients. It can take a long time for new debt collectors to be up to your standards, meaning that hiring new employees can have a financial impact on your business.
Dealing with difficult clients
Some of the debtors you will be working with will be unwilling to pay their debt. You may experience abuse, threatening behaviours, hostility and distrust on a daily basis. Being in debt can be extremely stressful, particularly if the debtor can see no way out of the situation or doesn’t agree with the situation. This can cause them to become angry and frustrated. Dealing with these types of clients can be difficult, particularly as you are expected to remain calm and professional throughout.
The emotional toll
It can be extremely difficult and emotionally draining chasing debts every day, as you will be dealing with people who are struggling financially. Hearing stories of families and businesses who are going through financial hardships and are unable to pay their debts can be very difficult and can present you with an ethical dilemma, as you may not want to pursue the unpaid debt, but you also have a professional obligation to the lender.
It can be physically demanding
Many people think this type of career is easy and results in no physical stress, as you will be sitting down for much of the day.
However, several physical concerns could be attached to this type of job, for example:
- Eye strain.
- Back and neck pain and strain.
- Musculoskeletal pain and strain.
- Reduced cardiovascular fitness.
It can be difficult to grow your client base
Many lenders who are looking for a debt collection agency will choose a well-established business with proven success or an agency that has been recommended to them. This can make it difficult to grow your client base, particularly because there are already a lot of well-established debt collection agencies operating. Difficulties in growing your client base will result in a reduced income and could affect your ability to continue pursuing debt collecting.
It can be time-consuming
Your working time will not be limited to the time you spend meeting clients. Instead, you will have a lot of research to do, materials to gather, calculations to do and repayment plans to create. Because you will be helping each client in different ways, each debt will require different types of preparation. This can be extremely time-consuming and can reduce the amount of available time you have to meet clients.
Complying with legislation
There are many different pieces of legislation and legal guidelines you will need to comply with. Not only can this be complicated and time-consuming, but any non-compliance (even if this is accidental) can be punished with a fine or the forced closure of your business. Some types of legislation also require you to follow very specific procedures, which can be costly and arduous. This can be very stressful.
Business can be inconsistent
You may have times when your books are full and you are working with multiple clients at once and other times when you have a smaller client base and lots of available time. It can be difficult to plan your finances, predict your profits and decide your working hours when your business is inconsistent. There could be times when you are less busy, and this can have a significant impact on your profits.
It can be stressful
You will have a lot of responsibilities, including meeting with clients, researching, planning and preparing, marketing and advertising and the tasks associated with the day-to-day running of your business. This can be stress-inducing, particularly when you are trying to grow your business. You will also have the additional stress of ensuring your business succeeds.
It can be isolating
Debt collecting can be a lonely career choice as much of the work you will need to do will be done alone. You will have no or very little face-to-face contact with other people and even if you have employees they will be working on their own cases. Many people in society also think of debt collectors as being ruthless and unfeeling and this can make it difficult for you to create meaningful business and personal connections.
Constant education and research are required
Even if you are an experienced debt collector, you will still need to conduct extensive research and stay up to date with methodologies, regulations and industry information. Failing to keep up to date can result in failures to collect debts, which can be detrimental to your business.
There are many staffing challenges you could face, such as a lack of staff motivation, client complaints about staff and staff not fulfilling their expected duties. It can be difficult to create and maintain a positive work environment when working in such a stressful industry. You will also have lots of responsibilities related to your staff, such as hiring staff, staff training, day-to-day management, staff rotas and staff payroll. While your business and your profits are growing, you may have to undertake many of these responsibilities yourself.
As you are self-employed, you won’t receive benefits such as pension contributions. You will also be responsible for doing your own taxes and organising your National Insurance contributions. You will also have a lack of job security.
Your business could fail
Starting up your own business can be risky. Many new businesses fail which could result in you losing money or getting into debt. Your business could fail for several reasons, such as high local competition, an ineffective business plan or if there is another recession or a period of financial difficulty.
Planning Your Debt Collection Business
If you are considering starting up a debt collection business, an effective and well-designed business plan is essential. A business plan can help you to focus on the specific steps that will help your business succeed, plan your short-term and long-term goals, determine your financial needs and help your business to grow.
Your business plan should contain information such as:
- Your company information.
- Your company description.
- The services you will provide.
- Your branding, marketing and advertising plan.
- The structure of your business.
- The operational plan for your business.
- The financial plan for your business.
When creating your business plan, some factors you will need to take into consideration include:
The type of debt collection business you are going to set up
This is the first consideration you will need to make when setting up your business. Consider the type of business you want to run, whether there is a particular type of debt you want to specialise in (such as credit card debt) and whether you want to work in conjunction with lenders or purchase the debt from the lender and work independently.
Your target market
Will you focus on a particular type of lender or creditor? Will you work with businesses for a percentage cost or will you purchase the debt from the lender? Your potential target market is any business or company that extends credit or loans. However, you can focus your target market more specifically, making it easier for you to market your business. When determining your target market, you should also consider whether you plan to work with lenders in your locality or operate nationwide.
Your staffing requirements
Your employee requirements are another important consideration you will need to make. What are your staffing requirements and which employees are necessary for the running of your business? Because your employee requirements can change as your business grows, you could hire fewer employees initially and then hire more as demand grows and you have the ability to increase your running costs.
When considering your competition, look at small debt collection agencies and larger businesses. It is also recommended that you look at both your local and national competition. Being aware of your competition is an important step to ensuring the success of your business. Analysing your competition allows you to look at what they do well and what you think can be improved upon. Look at the percentage commission they charge, how they run their business and their marketing strategies. Analysing your competition also helps you to identify whether there is space in the market for your business and can help you to identify any niches in the debt collection industry that you could exploit.
Your brand and your unique selling point (USP)
Creating your brand is a key way to ensure you stand out from your competition. Branding can help you to focus your target audience, attract customers and concentrate your marketing and advertising strategies. Some ways you can create your brand are by focusing on your business’s visual identity (e.g. your business name, logo, signs and your website) and creating a brand story. Your USP can also be part of your brand and can help your business stand out from your competitors. Consider what makes your business special and how this fits into what defines your business.
Your advertising and marketing strategies
There are many ways you can choose to advertise your business. This can include partnering with other businesses in your area, advertising on the TV and radio, advertising on social media, targeted paid online ads and contacting lenders directly. Your marketing and advertising plan should detail what your brand is and how you plan to promote your business. As part of your marketing strategy, consider the most effective ways to reach your target audience and attract potential customers.
Your equipment requirements
Consult the list above to determine your equipment requirements. The equipment you require will depend on the size of your business. Once you have determined your equipment requirements, you can then calculate the initial costs of purchasing the equipment.
Your start-up costs and running costs
Consult the list above to calculate your approximate start-up costs and running costs. Determining your approximate costs allows you to calculate your initial investment and what your monthly and annual running costs will be. You can then calculate whether you can finance your business yourself. Being aware of your expected costs also allows you to create a budget, which is a key part of your business plan. Once you have calculated your approximate costs, you can then calculate your pricing strategy and determine your profit forecast.
Financing your business
Consult the list of start-up costs and running costs above to determine what capital you will require. Can you finance the business yourself or will you need to source outside investment? You will also need to calculate when you are likely to begin turning a profit. If you require outside investment, you could consider a bank or other financial institution, a business loan or an investment partner.
Your payment strategy
Deciding how much you are going to charge your clients is an important consideration. With each client, you will negotiate the percentage of the debt you collect (most likely based on the complexity of the case and the size of the debt). Keep in mind that there may be some cases where you are unable to collect the debt and therefore do not make a commission, so negotiating a higher percentage for all of your jobs can help you to maximise your profits. As your business and your reputation grow, your payment strategy may change, and your percentage figure will likely increase.
Your sales forecast
How many debts can you realistically take on at one time? How long do you approximate it will take to solve each case? What are your weekly, monthly and annual sales forecasts? As your business grows, your sales forecast is likely to change.
Your strategy for growth
Your strategy for growth is the actions you will take to realise your goals for expansion and any potential challenges your business could face and how you will avoid or overcome them. This can help to make your business more successful.
Potential challenges could include:
- Difficulties finding clients.
- Uncooperative debtors.
- Repayment plans being significantly under the total debt owed.
Some potential strategies for growth include:
- Expanding your business into other locations.
- Hiring more debt collectors.
- Creating more comprehensive payment plans.
What is your business summary
Your business plan should include a detailed overview of your business, including the type of debt collection business you are setting up, your primary operation strategy, your typical customer base, your staffing and equipment requirements and your business goals.
What are your business goals?
Your business goals or objectives are an essential part of creating your business plan. Your business objectives highlight the targets and goals of your debt collection business and help you to create a one-year, three-year and five-year business plan.
Your business objectives should be SMART:
- S = Specific
- M = Measurable
- A = Achievable
- R = Realistic
- T = Time-bound
Have you complied with all legal requirements?
Consult the list of legal requirements above to check you have complied with all requirements and regulations and that all your paperwork is accurate. Failure to comply with legal requirements could have a detrimental effect on your business or could result in a fine, the forced closure of your business or, in serious cases, prosecution.