The Average Profit Margins for a Collection Agency
Many people think that when the economy is bad, the debt collection agency business booms, but that is seldom the case. If people can't pay their original debts to their lenders, they may not be able to pay the debt collection agency, either, according to information reported by "Forbes." When the economy picks up, collection agencies have a better chance of collecting debts and increasing their profit margins.
Many people assume that collection agencies buy debt for pennies on the dollar and then keep all the money they collect, according to "Forbes." But most collection agencies don't work that way. They instead charge the lender or business they work for a percentage of any money they collect, or they charge a flat fee no matter how much they collect.
When the economy was in the midst of recession from 2008 to 2010, there was plenty of debt to collect as large numbers of people defaulted on their loans. But collection agencies had a hard time collecting as well and had to reduce the percentage they charged on debt that they did manage to collect, which shrank their profit margins. Before the recession, in 2005, the average percentage charged by debt collection agencies was 23.5 percent, according to "Forbes." That dropped to 18.8 percent in 2010. Profit margins in the industry dropped from 6.73 percent for the industry in 2008 to 5.05 percent in 2010.
As the economy improved in 2013 so did the amount collected by debt collection agencies, according to a debt collection services report from IBISWorld. In 2013, the average profit margin for debt collection agencies was 9 percent. However, debt collection agencies typically don't like their clients to know when their profit margins rise because their clients might then try to negotiate a better deal.
The average profit margins are just that: averages. Within those averages are higher and lower numbers depending on the success of the collection agency. Requirements for success in the industry are to have a full understanding of the business, preferably having worked in the business before, and having a knowledge of federal and state laws. Debt collection businesses also need adequate capital to cover expenses and to have enough clients to carry them for six months because it could take time to make a profit in the industry, according to The Association of Credit and Collection Professionals.