In 2019 we are experiencing a marked uptick in alternative lenders who are interested in selling off their non-performing loans (NPLs). The benefits are clear. But why the increased interest, now? There are at least two reasons: online lending is maturing; and potential sellers are reassured once they learn how reputable buyers manage the accounts after sell-off.
A Maturing Industry
The fintech industry is maturing. Evidence of this includes the number of sizable investments taking place this year, as reported recently by Lend Academy. Online lenders are a segment of the industry that is growing, too. They are booking more deals, and, over time, a percentage invariably default and reach the charge-off stage.
Selling NPLs allows fintech lenders to speed up collections by concentrating internal talent on more productive pursuits. They also earn immediate cash for their charge-offs. Banks and equipment finance companies have been selling non-performing paper to commercial debt buying services for years and it is an accepted finance practice. Now online small business lenders are learning about this strategy.
I expect LendIt Fintech USA, which is coming up soon, will reveal more signs of a maturing industry. It should also be noted that alternative lenders are willing to finance higher risk borrowers than traditional finance companies do – yet another reason for a commercial debt buying partner.
Account Control Assurances
Many fintech lenders we talk with say it is important for them to know how their NPLs will be managed after sell-off. They want debtors to be dealt with diplomatically. They also want the option of buying back a single account if they mistakenly sell it. Once lenders find a commercial debt buyer who can assure them of this, they are eager to do business.
Not all commercial debt buyers or their brokers offer this protection, so it is important to work only with ones who do. This checklist for finding commercial debt buyers you can trust is helpful for evaluating potential partners.
We’ll recap the main takeaways in the next section.
First Comes Due Diligence
All industries have their good and bad players, and commercial debt buying is no different. Separating the two is a simple enough matter, though. Asking the right questions will ensure you are dealing with a reputable buyer or broker.
- What are the commercial debt buyer’s philosophy, collection process, and security procedures?
- Can the buyer provide references from similar types of sellers? The answer should be yes.
- Will the buyer collect debts over time, in a sensitive way when dealing with customers, and without representing themselves as the lender? The answer should be yes.
- Will the buyer resell the debt? The answer should be no. This allows lenders to buy back their loans should any issues arise post-sale.
- Will the buyer, and its broker when applicable, sign a non-disclosure agreement (NDA)? Make sure they have done so before providing any proprietary financial information.
- For brokers: can you show evidence of an established relationship with a specific buyer and have you done business with that buyer recently? The answer should be yes.
- For brokers: do you use NDAs to protect all parties’ confidential information? Again, the answer should be yes.
- For brokers: how will you share portfolio information, who will see it, and how will the NPLs be collected? Could the NPLs be re-sold at any point? The answer to the last question should be no.
How It Works
Here are answers to frequently asked questions and a run-down of how commercial debt buying and selling process works.
What kinds of commercial debt can be sold? Our firm buys non-performing finance products up to four years old from the date of the last payment, including commercial loans, leases and lines of credit. These can have personal guarantees, no personal guarantees, be secured, unsecured, pre-agency, post-agency, pre-litigation, reduced to judgment, etc. Other commercial debt buyers may have different criteria.
How does a lender decide what to sell? Lenders may sell off some financial products but not others, or they may include all financial products meeting their criteria. They may base their decision on vintage, such as whether an account is pre charge-off, post charge-off, zero agency or post agency. Our company feels post charge-off is usually the best timing. Lenders also may decide what debt to sell based on geography (national vs. state by state), specialty (Chapter 7 & 13, judgments), out-of-statute vs. in-statute (OSS accounts sell for basis points; ISS have the option of being litigated), by quality (prime vs. sub-prime), by balance (packaging a specific balance segment vs. the entire pool of non-performing accounts) or by pool size (one-off vs. pool).
How frequently should a lender sell? Our firm will work with lenders on a single engagement at a time if desired or multiple engagements over time. Many lenders choose to establish a forward flow relationship where they send us information on non-performing finance products on a regular basis for pricing.
What steps are involved? At our business, lenders new to the process start by contacting me at firstname.lastname@example.org or 847.267.0660. Next, they provide basic information on the pool of assets to be sold. We evaluate the assets and then make an offer. After the lender signs the purchase agreement, we wire the payment. Transactions in an established forward-flow relationship are even quicker. They can usually be handled online, with the resulting payment wired in 24 hours or less.
What happens to the accounts once sold? At our company, we work carefully and professionally to collect what we can of the debts over time, without representing ourselves as part of your business. TBF collects in its name only. We also do not re-sell the accounts. Our philosophy is most debtors intended to make good on their promises at the beginning of the transaction, so our goal is to make repayment as positive an experience as possible. That way the debtor is open to pursuing credit from the same lender in the future as a customer in good standing.
More questions? If you’d like to learn more and discuss the unique needs of your company, just reach out to me via my contact information below or we can plan a meetup. Our headquarters is in Chicago but I travel frequently. I’ll be at LendIt Fintech USA April 8-9 in San Francisco, the Debanked Broker Fair in New York City May 6, the pre-show party the night before, and ELFA’s Capitol Connections May 15 in Washington, DC. Travels later this year include speaking at LEND360 in Dallas.