Commercial Debt Buying & Selling Activity In Banking, Equipment Finance, Fintech Lending
By Brett Boehm
After an unpaid loan or lease reaches the charge-off stage, it’s called non-performing paper. But that’s really a bit of a misnomer. Non-performing paper can still pay off for finance businesses. Some equipment leasing companies, banks and fintech lenders sell all their non-performing loans and leases to commercial debt buyers. Others litigate balances above a certain amount and then sell off the rest.
The economy is one factor that can drive commercial debt selling cycles up and down. Interestingly, the Great Recession affected banks differently from equipment lessors in this regard – and later attracted alternative lenders. Here’s a brief overview of commercial debt selling trends in finance over the past 20 years.
- Back in 1998, few bank boards were willing to authorize debt selling activity for commercial non-performing paper even when bank executives expressed interest in it. Banks were in their heyday then, and their boards did not yet realize the value of selling commercial debt.
- Equipment leasing businesses specializing in small-ticket transactions were among the first lenders to sell off non-performing commercial paper. By 2005, increasing numbers of lessors were using commercial debt buying services regularly, and most were doing so soon after charge-off. (This timing is still typical today, regardless of the type of lender.)
- The Great Recession slowed commercial debt selling activity in equipment leasing significantly between 2008-2010. Yes, there was more non-performing paper available to sell, but much of it was uncollectible due to lessee business failures. Activity has been gradually picking back up since 2015.
- Conversely, the Great Recession prompted banks to take a closer look at commercial debt selling options. Activity increased considerably as banks started selling their non-performing paper to improve internal efficiency and generate fast revenue.
- Merchant cash advance services and later, online alternative lenders, entered the small- business lending marketplace in the aftermath of the Great Recession. Some alternative lenders are now using commercial debt buying services in the same way as traditional lenders do. In fact, this option is an especially good fit for fintech lending business models.
Commercial debt cycles are covered in greater depth in “Selling and Buying Commercial Debt: An Industry Evolves” in Equipment Finance Advisor. The guest blog post also discusses recent credit risk data, seller strategies and how to vet a commercial debt buyer.
Our own blog posts and website discuss how the process works and relevant developments. Alternative lenders may wish to visit http://tbfgroup.com/chargeoffs/ for information on how selling off non-performing paper is a good strategy for fintech business models.