Those new to the world of selling their debt to third party firms can take solace in knowing that they are not alone. A growing number of companies large and small are finding that selling aging A/R just makes good business sense, and for numerous reasons that include using internal resources more efficiently, and rapidly refilling cash reserves.
In the following article, Canaccede Financial Group reviews step-by-step, strategic ways to navigate the intricacies of debt sales. Whether small business owners or industry titans, businesses should prepare to explore the different options for selling off non-performing accounts, and what that could potentially mean for cash flow.
Introducing: Debt Buyers
A debt buyer is a company that buys aging receivables from creditors at the fair market value of the outstanding balance of the debt. The buyer will then collect the debt on its own, through collection agencies, or litigation firms.
- In order to recoup on a creditor’s outstanding debt, a debt buyer purchases it at the current market value of the sum owed.
- Creditors sell their debts for a variety of reasons, including capital recovery, liquidity needs, loss provision reduction, resource reallocation, and tax write-offs.
Debt buyers in Canada generally acquire overdue debt from credit cards, installment loans, auto loans, mortgages, retail accounts, telecom, and utility bills.
How Debt Buyers Create Value in Business
If a lender, such as a financial institution, is unable to collect payment on outstanding debts in accordance with the conditions of its financing, they will seek to recoup part of their losses. There are situations when a lender sees little chance of recovering the monies within the timeline specified when the loan or credit was obtained.
Rather than waiting for the debtor to pay off the overdue obligation in full, the lender has the alternative of continuing to work the debt internally or contacting a debt buyer – receiving an immediate return.
In general, selling debt makes sense if the lender has one or more of the following necessities:
- To increase liquidity (through monetary injection)
- Have a constant and predictable cash flow if selling on a monthly forward flow basis (no need to worry – the buyer assumes the forward risk).
- Create a profit and loss lift.
- Redirect resources to core activities or other areas with higher returns.
After acquiring possession of the overdue accounts, the debt buyer will utilize a variety of techniques to reclaim as much of the debt as possible. These attempts may include tactics such as negotiating a fresh set of repayment arrangements with the debtor.
The debt buyer’s overall strategy is to leverage the value of the delinquent loan to obtain a return on their investment. The debt buyer frequently has more freedom in their techniques of recovery than the original lender. This is because they have a long-term vision of rehabilitation for the client, creating additional recoveries that can translate into profit for the organization.
So, when a business finds itself burdened with delinquent business debts, don’t overlook the power of debt buying. Embrace this transformative option and witness firsthand how it can reshape a company’s financial landscape, propelling profits and success.