Is It Better To Sell Debt Or Use Contingency Collections?
If you are a business lending money then it is an unfortunate truth that not all of your customers will make their repayments on time and you may need help with collecting your debts. The more quickly you attempt to recover debt on delinquent accounts, the more likely you are to receive payment.
If you are a business looking to collect on these debts there are several options available to you.
Typically debt is collected either in house or it outsourced by either contingency collections or a debt sale. It is relatively common for lenders such as banks and other loan providers for the collections process to be internal initially, before being outsourced at the point the debt becomes too costly or challenging to collect on.
However when it comes to outsourcing debt collection to a Debt Collection Agency there are a number of different arrangements that can be made with the collections agencies that can deliver vastly different results dependent upon numerous factors within your business.
What is contingency debt collection?
Contingency debt collection is where a Debt Collection Agency collects debt on behalf of a client where the fees are a pre-agreed percentage of the sum collected. In other words, contingency debt collection is a no win-no fee collections agreement where the client retains ownership of the debt but is willing to pay a fee for the successful collection of the past due debt.
Why Use a Contingency Collection Agency?
Contingency collections can often be more lucrative for your business than collecting in house, as Debt Collection Agencies are a specialist recovery service. Although the agency only gets paid for successful collection efforts, their specialist methods ensure they are able to produce better debt recovery performance than many lenders are capable of.
Whilst your focus will be on marketing, credit risk, product development and many other important things - a Debt Collection Agency’s primary focus is on recovering payment from past due accounts. Most of their resources are therefore focused on collecting debt which means that Debt Collection services are able to focus on legal action and other time-consuming approaches.
Is using contingency collections expensive?
Contingency collectors may charge you a flat fee of anywhere from 25-50% of the money they collect on your behalf. Typically the more challenging a debt is to recover the larger you can expect the percentage share wanted by the Debt Collection Agency to be.
Some collection agencies work harder to recover the debt, and may also charge additional fees for account tracing or legal action.
Contingency collections work on a no collection no fee basis which means that the commission earned by the collector on the debts that are collected needs to cover all of their costs, including costs incurred on debts that they are unable to collect on.
What about debt they can’t collect?
You should not only measure the success of contingency collections by the amount of debt recovered but should also remember that your debts are an asset on your balance sheet. If you wish to sell debt in the future the value could be seriously impeded by having placed the debts with a Debt Collection Agency previously so you need to weigh up what matters the most to your business.
You may also need to think about what you will do with accounts that are passed back to you having not been recovered and whether you wish to write these off or sell them to another debt buyer. Whatever you decide to do you should think about this at the earliest possible opportunity, as the debt ages it becomes more challenging to collect. It is therefore going to become worth less and less to a debt purchaser as time goes on.
Selling your debt to a Debt Collection agency is perhaps the simplest way to manage your non-performing loan assets as the price is fixed and you can easily decipher what a proposed purchase price means to your business.
What is a Debt Sale?
A debt sale is where you take debt(s) and sell them to a debt buyer, who buys the accounts and takes legal ownership of them. As such when a debt is sold it is no longer owed to you and the debt is now owed to the debt purchaser. Typically offers are made in pence against the pound terms, in other words an offer is made to pay a fixed percentage of the face value of the debt. This offer is typically based on what the debt purchaser thinks they can collect from the debts and what it will cost them to do so.
Why should you sell debt?
Debt sales are so popular because they provide certainty and security to the selling business. Using a contingency collector can prove fruitful but is also a risk. If the contingency collector does not collect as much as you hoped then the damage to the purchase price of these debts may already be done, despite you having not got the returns you had hoped for from contingency collections. Selling debt is at an agreed price which is fixed regardless of how much the debt purchaser is able to collect from the accounts.
A debt sale can be done on a portfolio of aged accounts and/or agreed on future accounts. A forward flow agreement allows a price to be agreed on debts that fall past due in the future and can give you the stability to grow your business.
Debt sales can also lift a large burden from the balance sheet by removing the need for far past-due provisioning and providing a cash injection to allow you to improve your product offering or acquire new customers.
If it is this security that you after then a debt sale may be right for you.
What about my brand reputation?
Protecting your brand is important because it helps your business to acquire new customers and stand out within your industry. It is important to consider your brand reputation whether you are managing your non-performing loans in house or utilising a Debt Collection Agency in any way.
Just because you look to sell your accounts does not mean the Debt Purchaser can then collect in any way that they wish. Prior to agreeing to a sale, or contingency collections placement, you should review the debt collector’s processes to ensure that you are comfortable with them.
If there are parts, such as court action, you would sooner avoid being used in order to protect your brand then you should make this clear.
Most Debt Collection Agencies, whether on a contingency or purchase model, will adhere to your requests and work with you to refine the process to suit your needs. Just keep in mind that the harder it is for the purchaser to collect on the debt(s) then the less favourable the commercial terms may become for you as the seller.
If you have debts that you are unable to recover yourself it is important to act fast. The longer you leave it the less 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.