Selling debt vs. placing with collection agencies is a decision that creditors have to make based on different factors. If you are considering selling your debt, the first question you need to ask yourself is "What am I trying to accomplish?" The answer will help determine which option is best for you and your business. Below are four reasons why it might be worth considering.
Creditors have to figure out what's the best option for their business and situation. If they choose a collection agency, there are risks and rewards, or if they sell it off to an investor, that has its own consequences too!
1. Immediate Cash Flow
When accounts receivable from non-performing customers become trapped working capital, selling the debt can deliver cash flow to a company. This is advantageous for companies experiencing rapid growth and those with insufficient reserves. Converting an account into immediate funds allows sellers to fuel opportunities or strengthen infrastructure at no cost of their own resources.
2. Reduce Risks Correlated with Debt Collection
Creditors looking to sell accounts receivables should implement a third-party management strategy for the benefit of both parties. To avoid risks, creditors need to set policies in place and establish procedures that protect from vulnerabilities associated with the debt collection processes such as unauthorized access or disclosure of confidential information by vendors. By providing these protections through established processes and controls, creditors can receive immediate cash flow while reducing risk exposure at the same time. A qualified investor is an asset because they have previous experience working with law firms which will help ensure a smooth transition between service providers during transaction closeout.
3. Consumer Relationships
When an account goes delinquent, a creditor must rely on debt collectors to recover the monies owed. However, by selling these accounts off and not working with them directly anymore, creditors protect their own interests as well - they are no longer responsible for collecting or contacting consumers and can benefit from increased opportunity when that consumer recovers financially again in future lending relationships.
4. Cash Flow
When accounts become delinquent and charged off, their cash flow is difficult to predict. The debt collection process generates cash from these distressed assets but it's hard to forecast with accuracy. By selling the debts at a pre-defined moment in its lifecycle, creditors can't only more accurately determine when they'll receive money for unpredictable assets but run their business better overall.