Despite the increasing regulation in the UK financial markets and the rise in the quality and quantity of checks at the point of customer onboarding, there will always be customers who do not make repayments in line with the terms of their agreement.
Often these can be dealt with in the early stages of arrears. However, accounts can reach a point where a business decides to stop investing in the debt collection of a particular account because it is too challenging, time consuming or costly to do so.
Selling your debt portfolio to a collections agency or a debt buyer can be an effective way of alleviating the cost of non-performing accounts.
What is Debt Sale?
A debt sale is where a creditor sells part or all of their outstanding debt portfolio to a third party. It is a process where the original creditor allows a debt purchaser, often a collections agency, to buy and own that debt to attempt to collect it.
When a debt sale is conducted the debts are reviewed by the purchasing party and the offer is based upon many things, but essentially the purchaser will try to price the debt based on what they believe they can reasonably collect from the debtor portfolio.
Is Debt Sale Right for You?
Alongside selling debt there are other options available to recoup past due accounts and create liquidity from these. You may look at trying to bolster your in house collection efforts to include a more severe collections process that includes court submissions and thorough account tracing, or by offering settlements to customers.
Every business is different and has different needs and requirements. We can help you with the management of your non performing loans whichever approach you would like to take. Drop us a message and we’ll be in touch for a free consultation– no strings attached.
The Benefits of Selling Debt to a Collections Agency
Firstly, Debt Collection Agencies are specialist firms that work in highly regulated environments to ensure the fair treatment of customers at all times and are experts at assisting customers who are struggling financially. Debt collection agencies put bad debt for sale to good use and concentrate on working with the customers who choose not to pay but have the means to.
Frees Up Time and Resource
These types of accounts typically only make up a few percentage points of what has been lent by a lender, so typically this is not the focus of lenders. Lenders are often more focused on customer acquisition and the growth of their business and an aged debt warehouse can draw attention away from the primary focus. Allowing a specialist to take these accounts on saves you and your team valuable time and resources to focus on what you do best.
Increases In House Collection Efficiencies
We have found in the past that conducting a debt sale can actually increase the morale of your collections staff as well as your collections rates. Having a debt purchase partner means you have an additional consequence to use in your communications with your customers and having a point in your cycle that accounts are passed to a Debt Collection Agency allows you to gain insights into where you may have perhaps missed opportunities to collect previously. This continuous feedback loop can make your own teams more effective and efficient, helping you to resolve more customer accounts at an earlier stage.
Immediate Cash Injection
Selling a portfolio of debt also brings a financial return for your business, usually in the way of an immediate cash injection. This coupled with additional time to focus on growing your business or improving your product offering can be a very lucrative solution.
Reduce Administrative Burden
It is often presumed that you can only sell your non performing debts. With EverChain UK you can find niche buyers and achieve market leading pricing on portfolios of customers who are on Debt Management Plans and IVA’s to reduce the administrative burden these accounts bring. This is often an overlooked sector for debt sales as insolvency is seen as the end of the collections process, when it can actually create a worthwhile additional revenue stream for your business.
How Debt Sale Works
If you’re planning to move forward with selling your debt to a debt collector, there are a few basics to think about first. Firstly, you need to work out the debt purchase agreement, which is either a spot sale or forward flow agreement, or a combination of both.
What is a Spot Sale Agreement?
A ‘spot sale’ is a sale of accounts that are already past due. A spot sale usually involves payment via an immediate cash injection at the point of sale and is a one off sale. Selling these accounts will immediately alleviate them from your loan book alongside any provisions that sit on your balance sheet for these accounts. Often this is the type of debt sale a lender undertakes when it is selling for the first time as well as when a lender has left the market due to insolvency or any other reason.
What is a Forward Flow Agreement?
A ‘forward flow’ agreement is a rolling agreement for a fixed period of time for a debt purchaser to agree to purchase your debts at a particular point of the arrears journey on a regular basis. For example, agreeing to sell accounts to a Debt Collection Agency in the first week of each month where they have exceeded 90 days past due would be a forward flow agreement.
A forward flow agreement is based upon your financial projections, business processes and usually an example file to help the Debt Collection Agency price up the value of the forward flow agreement. Payment on a forward flow is made after each regular transfer of customers accounts to the debt collection agency. Typically, because the accounts are less aged than when a spot sale is conducted, a forward flow will bring in a higher percentage of the outstanding balances at point of sale as they are worth more to the Debt Purchaser.
Identifying Debt Purchasers
So now that you know what type of debt sale and purchase agreement you are looking to undertake, it is time to think about engaging with Debt Collection Agencies.
The Debt Purchase market is extremely large and diverse. According to industry research there were 810 Debt Purchasers in the UK in July 2019 so knowing where to start can be daunting.
Firstly consider the type of debt you are selling, many of the Debt Purchasers are small niche purchasers. So if the debts you are looking to sell are Business to Consumer (B2C) and (Financial Conduct Authority (FCA) regulated this narrows down the scope however there are still a vast amount of purchasers to engage if you want to ensure you receive the highest price.
Often those looking to sell their debts seek quotes from purchasers that are recommended to them to create a manageable shortlist of Debt Collection Agencies to obtain quotations from however this may not include some of the most lucrative offers. For instance, knowing which agency has the appetite and funding at the right time for your debt sale can be a minefield. This approach can ensure you find a debt purchase partner that will work well with you day to day, however you may be missing out on an increased purchase price for your business.
If you are looking to create a definitive shortlist which is likely to give you the best returns for your loan book assets, then you really need to know the industry and speak with others who also know the industry. Often some of the best Debt Purchase partners may be less well known because they are niche, so although they are not right for everyone they could have a real appetite for your debts. Smaller Debt Purchasers trying to obtain market share and grow their business are often well backed and may make you a better offer than a mainstream competitor.
You should aim to ensure your shortlist is large enough to provide a spread of quotes, without being so large that the resource requirements of the quotation process are excessive. Try to engage with the right purchasers at the right time to ensure you are only obtaining bids from the purchasers who have the appetite and funds to take on your accounts at true market value. Engaging a purchaser without the appetite often results in a bid being made that significantly undervalues your loan book.
What Debt Purchasers Require
Debt Collection Agencies will require non-disclosure agreements (NDA’s), secure file transfer protocol (SFTP) set ups and due diligence so the time constraints of engaging too many Debt Collection Agencies can make your debt sale very difficult to manage.
Once you have your shortlist you will need to engage with each Debt Purchaser from your shortlist. Those that are interested in making a purchase offer will ask you for a data file. If you are looking for a spot sale this data file will need to include all accounts that you are looking to sell. The Debt Purchaser will tell you what fields they require such as loan start date, default date, paid to date amount and various other information. The exact fields can vary depending on the Debt Purchaser but there is usually a lot of crossover between them.
At EverChain UK our panel of Debt Purchasers use our standardised quotation data schema so you only need to pull one data set on your customer’s accounts. However, please bare in mind that you may need to undertake several data queries for your debt sale if you choose to go it alone which can become expensive depending on the complexities involved with pulling the necessary data from your database.
In order to make an offer the Debt Purchaser will also want to know about your business. For instance, what checks did you do prior to lending? The stricter the checks the higher the purchase price typically is, so it’s important to detail all of the checks you do alongside the collections process the customer accounts have been through so far. The more information you can provide at this stage the more the Debt Purchaser will understand the value of the accounts and the more likely you are to receive offers that reflect the true market value of the loan book.
The EverChain UK service includes us engaging with a specially selected curation of Debt Purchasers based on the requirements of your business and a detailed investment proposition being written for you. This helps to enable a smooth, transparent and lucrative transaction for your business whilst allowing you to focus on what you do best whilst we get you the best offers.
Reviewing Your Offers
Once all of your chosen Debt Purchasers have made their offers on the debts you wish to sell you need to review these offers and decide which Debt Collection Agency you would like to use. Hopefully your initial shortlist only included those firms which you would be comfortable working with from a compliance perspective.
Despite a Debt Purchaser having reviewed your data to make an offer there is often room for negotiation especially with purchasers who have the funding to grow their business.
Once you have agreed a price with your chosen Debt Purchaser it is time to conduct due diligence.
Due diligence is a reciprocal task when conducting a debt sale, so be prepared for your Debt Purchase partner to want to conduct due diligence on your business. This is likely to include all areas from customer onboarding, to vulnerability to complaint handling along with everything in between.
You should aim to conduct due diligence as soon as possible so that you can still engage with other Purchaser’s offers if there is an issue with your first choice Debt Purchaser that comes to light in due diligence.
It is a good idea to complete as much of the due diligence off site as possible so that the Debt Purchaser can more easily accommodate your due diligence as it will be less resource intensive for them. Policies, processes and regulatory company information can all be obtained and reviewed remotely to make the most of your time on site if required.
It is important to ensure that your due diligence is thorough and well documented from a compliance standpoint, especially if the debts you are selling are regulated ie. consumer credit debts.
Legalities of contracts can often be a hold up on projects in any industry or company of any size. To ensure your sale goes ahead smoothly you should begin reviewing the Debt Purchasers contracts in tandem with the due diligence. If changes are required this could cause your debt sale to be held up so it’s key to get the contract approved as early as possible to remove another hurdle from your end goal of selling your debts.
In the contract there is usually a ‘date of assignment’. You should try to complete the sale process as close to this date as possible. A date of assignment is the date in which the cases become assigned to the Debt Collection Agency. This is inserted by Debt Purchasers so that if there is a significant delay to the sale being finalised then they are not losing out on the collections between the date of assignment and the date the accounts are officially taken over by the debt purchaser.
You should take another data file cut at the date of assignment and give this file to the purchaser also. This means you remove any customers who have made arrangements with you between the date of the original data file and the date of assignment. Of course you can still choose to sell these accounts but it usually does not make financial sense to do so.
After the date of assignment you will still need to service the accounts yourself until they are officially passed over to the debt purchaser but you’ll need to forward any money collected on these accounts to the purchaser once the deal is completed.
Ideally a debt sale should be concluded on the day the contract is signed to keep this period as brief as possible and reduce the burden of administration on you.
Once the contract has been signed and executed and due diligence is completed your purchaser will make payment of the agreed amount and takeover control of the accounts.
Do I Need to Do Anything Else With Sold Debts?
Once the accounts are officially sold there are still several things you need to and responsibilities that you will have as part of your contract with the purchaser.
Firstly you need to send a ‘goodbye’ letter to your customers, instructing them with who now owns the debt. The Debt Purchaser will then send a ‘hello’ letter introducing themselves and instructing the customer on how to contact them.
It is important you have the systemic functionality to mark these accounts as sold on your systems. Once they are sold you cannot send communications to the customer chasing the debt and should not be reporting to their credit file. The Debt Collection Agency will usually take care of this.
You may also need to think about training for your frontline staff on what to do if these customers contact you directly, the customer should be referred to the Debt Collection Agency and any payments that are received directly from the customer should be regularly forwarded on to the Debt Collection Agency.
There will be numerous other post sale processes depending on the exact details of the contract you have with your chosen debt purchaser. You may be expected to buy cases back if they meet certain conditions or to pass across loan agreements to aid with customer disputes.
These post sale reporting requirements are important because they help your Debt Collection partner service the customers. The better they can do this the more they are likely to offer you for your debts when your contract is up for renewal or there is another batch of cases to sell. So it is important to work with the Debt Collection Agency to ensure you understand the expectations and can implement processes to ensure the effective management of post sale processes.
All that is left to do now is to decide what to do with your increased cash flow. Whether you choose to grow your business through acquiring new customers, or improve your product offering you can find a significant additional revenue stream through undertaking debt sales.
Debt Sale Alternatives
Some businesses alternatively choose to appoint a Debt Collection Agency to collect on their behalf, without actually selling the debt and assigning ownership to the Debt Collector. In this instance the Debt Collection Agency will undertake the work for a pre agreed percentage of the funds collected. This is usually between 35% and 50% (+ VAT) depending on the age of the debt and the costs involved in collecting it, weighed up against what the agency believes they can collect from the accounts.
It is important to consider all options when reviewing what is right for your business. The more you do in house, or with a contingency collector, the more options are removed from the final debt purchaser as being ‘new collections tools’, and the collections projections will reduce. This in turn can significantly reduce the price your loan book is worth to a purchaser. Having an in house team that specialises in more aged debts can be an expensive specialist resource, which also needs to be factored in.
Whichever route you choose, EverChain UK can help your business grow by helping you to manage your non-performing debt. Fill out the form below for a free no obligation consultation.