- 28 Feb, 2022
Assuming your business model is to lend money to people, whether that’s high cost short term credit, or car finance, you may have encountered that a portion of your loan book are non-performing accounts. This causes a particular concern for a lender, because a majority of the business’ value is made up of the outstanding debt. Where a cash injection is needed, or operational resource needs liberating, the finance provider could conduct a debt sale: where they sell the ownership of the accounts where they have been unable to collect the outstanding balance. A debt sale can be a brilliant method of relieving a business of a non-performing portion of their portfolio, but it's also important to ensure you benefit commercially from it. Prior to agreeing a debt sale agreement. you should always value your loan book to understand how much you could get for it.
The Process of Selling a Loan Book
Before you go ahead and undertake the complex process of selling your loan books, it’s a good idea to understand how it works. Put simply, a debt sale is where a lender sells their arrears accounts for a fraction of the price to a third party, usually a debt collection agency, to collect on them. The third party then assumes ownership of these debts and can attempt to collect the full amount.
Debt Collection Agency are specialist businesses that have the resources to collect debts more efficiently than some lenders. They use legal action and more rigorous tracing exercises to open a line of communication with a customer and reclaim the owed money. A collection agency’s business model means they can afford to spend a longer time attempting to collect the debt.
You can learn more about how a debt sale works on our dedicated guide.
Examples of When Loan Portfolios are Sold
What reasons are there for selling a loan book? We've explored this topic in more detail below:
During Financial Hardship Or Administration
Selling a portion of your loan book can help you ride the financial pressures by getting an instant cash injection. As well as this, if the company is entering administration it makes sense to reclaim the money for the business’ creditors by selling their loan portfolio.
An example of this recently is where the payday lenders like Wonga had been forced into administration due to the rise in customer compensation claims made against them. Due to the amount of money owed to the business’ creditors, instead of the administrators attempting to collect the money, they could sell the accounts to a debt collection agency instead.
When a company has entered into administration the whole loan book can be sold; which includes both the non-performing accounts and the accounts that are actively making repayments.
To Prepare for a Business Sale
A lender may be on the verge of being sold to a buyer so that they can acquire the lender’s customers, but that does not mean they also want to purchase the non-performing loan book. A buyer looking to acquire a financial provider could be put off by the volume of arrears cases that accompany it.
Therefore, to avoid negotiating a price that includes the segments of non-performing accounts, the lender could sell this portion of their credit portfolio in order to secure a more certain valuation of their business.
What Affects the Price of Your Loan Book?
If you’re asked “how much does it cost to buy debt?”, the answer is simply that it depends.The price of your loan book is determined by a variety of different factors, and is particularly affected by how much the buyer would be expected to collect and profit. This is a list of some of the factors that can affect the price:
Are the Loans Unsecured or Secured?
A secured loan makes it easier to recover the debt as if the debtor does not make the required payments against the debt then the asset can be repossessed and sold to help pay off the balance owed, which can improve the sale price for secured loans when compared to unsecured loans.
However sometimes security is requested because the applicant is less creditworthy and in this instance both of these factors need to be taken into consideration when valuing your debt portfolio.
What is the Affordability of the Debtors?
If your debtors are earning more money than they spend they will have a positive disposable income. Whilst these debtors will not necessarily by any easier to engage with they should provide better results where engagement happens as they can likely afford to pay the debt off in a shorter amount of time which deleverages the Debt Purchasers risk and reduces the risk of the debt being written off for insolvency. With reduced risk for the purchaser will also come a greater purchase offer.
What Other Data Points Have You Traced for the Debtor?
If you’ve managed to trace extra information to the debtor such as a new address, then the debt buyer is likely to spend more money on that data as it reduces the casework for them.Typically Debt Purchasers will conduct a tracing exercise on a debt where they do not hold the debtors up to date contact information. Keeping your customer’s contact details up to date can reduce the work for a Debt Collection Agency, saving them money that can be used for the purchase from you instead.
Has the Loan Book Been Previously Passed to a Contingency Debt Collector?
If a debt has been outsourced to debt collection agencies previously then this can make it harder to recover the debt as the debt collector is likely to have utilised several of the ‘quick wins’ to collect the low hanging payments from the loan book.
When Did the Debt Originate?
The sale value of outstanding debt depreciates over time, as typically the more time that has passed since the debt was owed the more challenging the debt is to collect on. The older a debt is the more important it is to have a strategy in place to deal with this before debts become statute barred.
What is the Past Payment Frequency Made on the Accounts?
How reliable the debtors are at making regular payments will affect the price of the data. Accounts with no payments on are more likely to be fraudulent and yield no collections also which can further decrease the value of your loan book.
When Was Contact Last Made With the Debtors?
The longer it has been since the original creditor was able to make contact, the more work the debt buyer will have to put in to trace the debtor. Address and contact information changes may have happened since your last communication.
Where Do the Debtors Live?
The debt recovery process varies across the UK and this can affect the value of your loan book. The court process in Scotland is significantly more expensive than in England and as such can mean that it is more expensive, time consuming and challenging to collect Scottish debt which can reduce the value of your loan book.
How Much Do Debt Buyers Pay for Debt?
Essentially, a debt purchaser will only pay for data that they expect they can make a profit on. However, a debt buyer will pay for the quality of the data being sold, so they will categorise each line of data based on the facts about the debt that we’ve outlined above.
Many of the large debt collection agencies that buy loan books have developed algorithms to help them generate an accurate valuation of the portfolio. Despite the algorithms being potentially complex, it simply all boils down to how likely they are to collect the outstanding debt. Debt purchasers calculate the price by using machine learning to compare the data points attached to previous accounts where they successfully collect payments.
Aside from a debt purchaser’s calculation algorithms, the price that they pay will also depend on their business’ appetite to take a risk. The higher their risk appetite, the more likely you are to get a higher price.
The primary assessment a Debt Purchaser will use to evaluate your loan book will be to check how many of the accounts they already have in their system. If a data deduplication check shows that the purchaser has previously collected payments with a portion of the loan book, then this will improve the asking price. Therefore it’s important to know which debt buyers to approach.
Why Using a Broker Can Improve the Valuation
Identifying the right debt purchasers to sell to is key to getting the best price for your loan book. The debt purchasers who have a higher number of successful similar or matched cases are much more likely to offer you a higher price to acquire your debt portfolio.
EverChain UK can help your business if you have debts that you are unable to collect yourself. If you need guidance and advice on how to approach a debt purchaser, we have an extensive financial background with several years experience in debt collection, lending and credit brokering.
Remember, the longer you leave it the lower the price you are likely to receive from contingency collections or debt sales. Talk to us today for a free consultation and see how we may be able to help you better manage your debt portfolio.