New to debt selling? That’s okay, many companies are. Here is a guide that helps explain the process.
First of all, what is a debt buyer?
A debt buyer is a company that purchases debt from creditors at fair market value of the debt’s outstanding balance. The debt buyer then collects on the debt either on its own, through collection agencies or law firms.
- A debt buyer purchases a creditor's debt at the current market value of the outstanding balance in order to recover on it.
- Creditors sell their debts to achieve different objectives – including releasing capital, reducing loss provisions, re-deploying resources, or generating tax write-off.
In Canada, debt buyers primarily purchase delinquent debt from credit cards, installment loans, automobile loans, mortgages, retail accounts, telecom and utilities bills.
How Do Debt Buyers Create Value?
If a lender, such as financial institution is unable to collect payment on outstanding debt according to the terms of their financing, they will look to recover some of the loss. There are times when a lender sees limited opportunity to recover the funds within the time frame originally outlined when the loan or credit was taken out.
Rather than continue to wait for the debtor to pay off the delinquent debt in full, the lender has the option to continue to work the delinquent debt or they can engage a debt buyer and get an immediate return on their outstanding debt.
Generally, it makes sense to sell debt if the lender has one or more of the following needs:
- Improve liquidity (i.e. cash injection)
- Have a stable predictable cash flow if selling on a monthly forward flow basis (no need to worry about you or your agencies hitting net collection targets the buyer takes on the forward risk.
- Create a P&L lift
- Re-focus resources on core operations or other higher return areas
- Rationalize overheads associated with collection efforts
- Create a stable offset of loss provisions to enhance financial result predictability
The debt buyer, after taking ownership of the delinquent accounts, will employ a number of strategies to reclaim as much of the debt as possible. These efforts can include restructuring a new set of terms for repayment with the debtor.
The overall approach of the debt buyer is to leverage the value of the delinquent debt to gain a return on their investment. The debt buyer often has more flexibility than the original lender in their methods of recovering as they have a long term view of rehabilitation for the customer in order to generate more recoveries that can translate into profit for the company.
The Wrap
Managing your receivables is an important part of business, just like other assets. Receivables should be managed properly, and it can sometimes be a difficult task to manage internally.
Outsourcing your debt recovery can offer some smart and timely alternatives. Canaccede Financial Group is the largest multi-asset acquirer in Canada. we provide both debt servicing and purchasing solutions. Our expert valuation team can work with you to size the debt recovery potential for your organization. If you, or someone on your team, would like to find out more, please contact us at partnerships@canaccede.com .
To find out more about CFG and how we can help, click here.