Debt Buyers Can Purchase Your
Charged Off Delinquent Debt
For Immediate Cash Flow
Debt buyers are companies, often collection agencies themselves, that purchase charged-off or otherwise delinquent debts from an organization or business for an agreed upon percentage of the debt portfolio's face value. This can be an attractive option to consider, especially if your business is in need of immediate cash flow, or you don't want or have the time to bother collecting the delinquent accounts yourself, you might want to look at selling your bad debt. Many organizations, including banks, credit unions, hospitals, other medical providers, telecommunication companies, utilities, etc., sometimes opt to sell their portfolio of written off bad debt, for immediate cash flow benefit, as well as the convenience of not having to staff in house collectors to do so. Benefits of Selling Your Accounts ReceivableDebt selling of delinquent accounts to a debt buyer is very effective in speeding up cash flow. This cash flow is immediate, goes directly to your business' bottom line, as opposed to the uncertainty and cash flow timing from a traditional placement with a collection agency. While it can take several months to gain recovery benefits from accounts placed with a collection agency, when you sell your debt, you receive instant, immediate benefit, increasing your cash on hand. Other advantages include: - Streamlining your business operations
- Decreasing potential liabilities
- Reduced collections-related operating costs
- Re-prioritizing core business functions
You can immediately recover on accounts that had once been written off as bad debt. When To SellYou can agree to sell old accounts going back several months or years from the original invoice date. You can also agree to sell to a buyer in the future, on an ongoing basis, by entering into a forward flow agreement. A forward flow is an agreement between a debt buyer and debt seller to transact a fixed amount of debt over a fixed period of time for an agreed upon price. For instance, a debt buyer and debt seller may enter an agreement to transact $10 million face value of debt each month for 12 months at a price of 8%. You might set a trigger to sell accounts once they reach 12 months following the date of sale or service, or 9 months after referral to a collection agency. Obviously, newer accounts have more value than older more aged accounts. However, accounts aged six years, or up to the statute of limitations, can be sold. Accounts Not To Sell- Accounts where the customer has declared bankruptcy
- customer is deceased or incarcerated
- account has been otherwise closed
- accounts that are in payment arrangements with your business or a collection agency
Some Possible Pitfalls Of Debt SellingAside from the benefits, some institutions fear loss of control after selling their debts to a buyer. One way to maintain control is to contractually prohibit the resale of your accounts once sold to the first buyer. Also, be sure to check a debt buyer's references and make sure their collection practices are consistent with your organization's values and ethics. Its also important that the buyer is licensed to practice in the state(s) necessary, and that they follow all state and federal laws. In the case of hospitals, selling bad receivables might have a negative impact on bond covenants, as some covenants restrict the selling of a hospital's accounts receivable. Managers need to get the advice of the hospital's legal department before entertaining selling to ascertain if there are bond covenants which might block the sale. Recourse and Non-Recourse SalesA recourse sale allows the buyer to return accounts to the seller for a refund of the purchase price. For instance, if the buyer was unable to collect on the account. Non-recourse means "as is", and it assures the seller that all risk for collection is assumed by the buyer at the time of purchase. This added assurance also means you can book the sale as an immediate recovery, with no fear of a future "buy-back" from the buyer. Debt Buyer ConsiderationsChoosing a debt buyer is very important, and they should reflect your organization's values and ethics. They should handle your accounts professionally, ethically and of course within all federal and state laws. Check with other similar businesses who have used debt buyers for references. You need to know: - Are the debt buyers employees professional and well trained?
- Do they specialize in your particular industry? (banking, utilities, telecom, healthcare, etc)
- Do they service the accounts themselves, or will they be resold or outsourced to third parties? You don't want to sell to a "middleman" buyer, but rather you want to know that the buyer of your accounts is the same entity that will be collecting as well. Not doing so could result in a negative image of your business, as its common practice for debts to be sold and resold several times over.
Getting A Debt Buyer ProposalPricing will depend on a number of variables, such as the age of the accounts, average account balances, geographic and demographic factors, account type and mix, whether they've been previously placed with a collection agency, and resale provisions, etc. Debt buyers will want to do an evaluation of your business or organization before offering a proposal. A contract will include account factors already mentioned, as well as sale of old archived accounts and/or forward flow accounts. Important Considerations Before Contracting With a Debt Buyer |
