Posted on April 19, 2021 by Brett
Death and taxes are not the only certainties in life. For lenders and lessors, there are also charge-offs.
As more loan and lease payment deferrals granted during the COVID-19 pandemic come due, their impact has been a topic of much speculation in commercial finance. Will there be a significant bump in defaults? Groups like the Equipment Leasing & Finance Foundation have been reporting on the situation but, so far, the full impact of deferrals has been hard to quantify across the commercial finance landscape, which includes online business lenders, equipment finance companies, banks, and merchant cash advance businesses.
Still, we know charge-offs are likely to rise regardless of deferrals.
Why? Rising originations in the pandemic economic recovery.
A relatively small percentage of commercial loans and leases default and reach charge-off – anywhere from 1-5% depending on the industry. For example, if a company books an average $20 million per month and charges off 2%, that’s $400,000 per month and almost $5 million per year in charge-offs. Larger companies book greater volume than this, and online lenders tend to book a lot more with a higher percentage of charge-offs.
As the volume of originations increases in the pandemic economic recovery, so too will the volume of charge-offs.
None of this is surprising to experienced lenders and lessors. It’s just a reminder of the importance of handling charge-offs effectively.
Many finance companies are using commercial debt sales as part of their success strategy for managing charge-offs. By selling off all their charge-offs or select categories of charge-offs on a regular basis, they are earning immediate cash and keeping resources focused on more lucrative recoveries.
I’m happy to answer your questions about commercial debt selling and invite you to explore our website for further information.
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Brett Boehm is CEO for TBF Financial. He can be reached at bboehm@tbfgroup.com, phone 847-267-0660 or via LinkedIn. |
