Starting A Debt Buying Business BEST
Most people are familiar with debt collectors, but fewer are familiar with debt buyers. Debt buying happens in the background: very few people know about it. That said, there is a growing interest in debt buying, because investors acting alone or in companies know it can be an extremely profitable business.
starting a debt buying business
If you are interested in this industry and want to learn how to become a debt buyer, this article is for you. Here we outline the crucial steps you need to take to become a debt buyer, from forming a business entity to doing the due diligence necessary to enter at times risky financial deals.
Debt buying processes vary depending on the reasons for purchasing the debt and the type of debt you are interested in buying. For example, you may be interested in buying debt so that you can legally enforce repayment from the borrower.
In some states, it is legal to operate as a debt buyer without a license and without becoming a debt collection agency. Much more commonly, the state will require you to get licenses and permits prior to beginning any business activity (including setting up a marketing website). Some states (for example, Texas) may not require a license if you operate solely in that state but do require a license if you operate across state lines.
Ethics are important in debt buying. Depending on your location, you may find that professional and even state and federal regulatory bodies strictly enforce them. Membership in the following organizations is highly regarded when collecting or buying debt or otherwise seeking to do business in this industry (and could get you more business):
The CFPB is a federal government agency that seeks to protect consumers against predatory financial practices. With malpractice in the debt buying and debt collection industries being so prevalent, the CFPB has taken on a particular interest in this area of financial activity.
Anyone wanting to enter the debt buying business should take CFPB reports and recommendations seriously if they wish to avoid the litigative fate of so many buyers and collection agencies in this space (including Encore Capital Group, Midland Funding, Midland Credit Management, and Asset Acceptance Capital Corp., who (in)famously settled a lawsuit started by the CFPB in 2020).
The RMAI (Receivables Management Association International) advocates ethics and professionalism in debt buying and collection and has memberships for those involved in these industries. Memberships entitle individuals and agencies to:
In debt buying, you have access to a wide variety of borrower data points, from names and addresses to SSNs and bank details. The hardware and software your business uses must be secure and compliant with all legal and industry standards. This is a complex task that will require deeper research depending on the debt you are buying. Ask an attorney if you are not 100% sure about what protections you need to put in place for data security and privacy as a debt buyer.
Due diligence is critical in the debt buying realm. As a debt buyer, you have very few protections in place to protect your investments, meaning you are the sole person responsible for verifying the details and legitimacy of a debt purchase.
The debt buying industry has grown enormously. Many attribute the start of the industry to the savings and loan crisis of the late 1980s and early 1990s. In the 1980s, the government auctioned off for collection nearly $500 billion in unpaid loans that creditors had owned to the private sector, which profited from collecting on the debts. Seeing a new market niche, debt buyers thereafter began to purchase other kinds of debt as well.
Debt buyers are often financed in part by large national banks and Wall Street private equity funds. In other words, many of the credit card companies and banks that sell their old debt to debt buyers partially fund the debt buying industry.
Running a small business is not a job for the faint of heart. Entrepreneurs work long hours and take on many different challenges requiring a broad range of business skills. Potential business owners looking for a new venture may choose to build a company from the ground up, or buy an existing company or franchise. Companies with a loyal customer base and steady revenue stream can be enticing, though the initial investment might be higher than starting small and building slowly. Let's look at some of the pros and cons of buying an existing business.
There are several advantages of buying a successful existing business, from convenience to a quicker (and safer) return on investment. Knowing the benefits of this business strategy may well tempt the aspiring entrepreneur.
Among the many pros of buying an existing business, perhaps none is more critical than starting out with the workforce and established operational systems that presumably made the company attractive enough for you to buy it in the first place.
An existing business should have systems in place to track financial information, inventory, and sales, as well as to perform other essential tasks. Starting from scratch means spending time and money to develop these processes. In cases where outside assistance would be required to set up a new venture, some gains in cost-efficiency may be recognized by buying an established business instead.
As with any investment, there are both pros and cons. Research the company as much as possible prior to making an offer. Don't limit your information to what is presented by the current owner; get out into the community and talk to vendors, customers, and anyone else who has dealt with the business for sale. Engage a financial adviser to study the information provided by the current owner and offer advice on pricing. You can also work through the buying-an-existing-business checklist provided by SCORE. There are several factors to consider, but generally aspiring entrepreneurs must be mindful of the initial outlay of money and wary of the situation they're walking into.
Buying an established business will often cost more than starting from the ground up. Further, established businesses that are highly profitable will likely cost more than those involving more risk or a "fixer-upper" in need of an investment in technology or modernized equipment (see below). In comparison, when starting your own business, you have the option to start with a smaller investment and grow slowly over time.
The existing structure can also be one of the cons of buying an existing business. Overstaffing and inefficient processes are examples of hurdles that must be overcome before the company can achieve its full potential. Ask the current owners about inspecting company systems before the purchase, to get an idea of what needs to be upgraded. If technology appears outdated and needs to be replaced or redeveloped, work this into the overall cost of the business. Sometimes, outdated systems are so entrenched throughout the company that it might be easier to create a new business from scratch.
If the existing business has a poor reputation in the community or many negative customer reviews online, this may pose a challenge for new owners. Inheriting a poor reputation for customer service means new management will need to go the extra mile to make sure they're exceeding expectations. As such, you may not be able to raise prices to keep up with competition. Prior to buying an established business, consider how much effort will be required to reshape negative aspects of a company's reputation or culture, and factor this into your decision.
When considering a business purchase, it's important not to cut corners in your evaluation. What you see on the outside may not be a true picture of how the company is run behind the scenes. Keeping the pros and cons in mind can help you spot potential issues, and provide a basis of comparison when evaluating more than one business opportunity. If you're serious about buying an existing business, use a checklist of best practices to give you the best chance at success.
Would you prefer a solo work-from-home endeavor as opposed to managing a retail shop with set hours? Before buying a business, consider the personal commitment and how it will differ from your current job situation. If you've never run a business before, consider buying a franchise that offers more operational guidance and set policies and procedures. Location and industry are big factors in deciding what type of business to purchase. Also, getting up to speed on a job in a new field may require a further investment in training and education.
An owner selling a business will ask for a price they believe makes a deal financially worthwhile for them. They will also offer information to support their asking price, such as the company balance sheet, cash flow statement, and sales data. Many factors come into play when valuing a business for sale, and different methodologies may be employed. In addition to physical assets and sales numbers, a company's brand and reputation may often contribute to the worth of the business. The balance sheet values are a good starting point, but true insight is only obtained with a deeper analytical dive into the company.
While the ROBS structure can be complex, the end result is your ability to buy or start a business without going into debt or collateralizing your home. For a more in-depth explanation of the ROBS structure, check out our Complete Guide to 401(k) Business Financing.
"Once you're approved for a personal loan, you can use it in any way that makes sense to," said Ashley Russo, a Financial Planner and Educator. "If you're starting a small business, you can use the personal loan to cover anything from inventory to payroll to rent. But you might consider doing it at the lowest possible cost to you, which means taking out the loan with the lowest possible interest rate." 041b061a72