A cautionary tale about what NOT to do with loan defaults
By Brett Boehm
The caller – a broker for an online small-business lender – was desperate. The lender had signed a deal to sell its non-performing loans at charge-off. Smart move. But the buyer turned out to be a rookie: big promises, followed by zero payments on the closing date. The lender’s CEO had been counting on the funds coming in. Could an experienced commercial debt buyer step in to save the day? This is a true story with relevance for fintech lenders, merchant cash advance businesses, banks, and leasing companies.
Commercial debt-selling is a strategy for managing non-performing loans and leases (NPLs), often used for those past charge-off. The payoff? Faster collections and fast cash. So, the online small-business lender had a good plan. Just the wrong buyer.
Closing day passed without the promised payment. That’s because the “buyer,” a collection agency, didn’t have the money after all. Now, there are collection agencies out there that are good at what they do. But commercial debt-buying requires specialized skills, not to mention sufficient funding.
We learned about the soured deal when a broker (a professional who had not originated the transaction) called to see if we could help. The lender’s executives were worried: their CEO was counting on the cash infusion by month’s end. Could TBF Financial save the day? The broker said she thought we were the only commercial debt buyer that could turn around a deal like this in less than 24 hours.
We wanted to help, and we’ve done so in similar cases before – too many to count. But this time, we could not make the numbers work. The online small-business lender had unrealistic expectations for the transaction because of the collection agency’s inflated bid.
Going with the highest bid is a mistake if the buyer doesn’t have the expertise and funding to back the deal. Commercial-debt selling pays, but only when you are dealing with an experienced commercial-debt buyer.
Accepting the highest bid is also a mistake when it is well outside the fair market value. For example, if there are five bids and four are $.05-.07 per dollar but one is $.11, there is possibly a reason for that outlier. It could reflect an improper assessment of the value, which can lead to desperate measures later by the buyer to recoup their money. Why should the seller care? While the buyer will collect in its own name, the debtor will still associate the obligation with the lender or lessor that issued it.
There are two main benefits of selling NPLs that have reached the charge-off or write-off stage (30 – 180 days past due, depending on the lender): It speeds collections by allowing staff to focus on accounts that are earlier in the past-due cycle and more likely to be recovered. Selling NPLs also generates immediate cash.
Commercial debt-selling has been an accepted practice for more than 20 years. That’s when our company began buying debt from equipment leasing companies and banks. In recent years we also pioneered debt-buying from fintech lenders, including online small-business lenders and merchant cash advance companies.
More online lenders and merchant cash advance companies are selling NPLs as their businesses mature and expand. Some are also using commercial debt-selling to help prepare their operations to weather a possible economic downturn. See the link near the bottom of this article to learn about a recent $60- million transaction involving one of our clients.
The buyer should have success in commercial debt-buying, which is different from consumer debt- buying or traditional collections. Safeguards should also be in place protecting the seller’s information and its customers. See the buyer checklist link near the end of this article for a rundown on the necessary qualifications.
Simply provide the commercial debt buyer with the requested information on the pool of assets being sold. The buyer makes an offer. The lender then signs the purchase agreement and the buyer wires the funds at closing. Lenders and lessors who have forward-flow relationships with companies like ours typically handle the process online and receive payments the same day.
Educating commercial lenders and lessors about debt-selling and -buying is part of what I do. I am happy to answer questions whether or not you decide to use TBF Financial’s commercial debt-buying services.