Posted on March 14, 2020 by Brett
Market-shifting events can hinder recoveries and increase risks
It will be some time before the coronavirus outbreak, COVID-19, is under control and markets become more stable. Already there are significant health and economic impacts in the United States. Unfortunately, just as the virus is proving to do the most harm to patients who are already vulnerable, market-shifting events like this tend to affect vulnerable business practices the most.
One vulnerability for fintech lenders, banks, equipment leasing companies and merchant cash advance businesses is chasing non-performing commercial loans and leases (NPLs) past charge-off. Depending on the lender or lessor’s criteria, that’s the point when accounts are 30 to 180 days past due. Fewer funders hold onto NPLs past charge-off today than they did in the past, but some still do.
I don’t have a crystal ball to foresee the exact impact of COVID-19 on your company’s NPLs. What I can predict is that an event like this – or any significant downturn in the economy – is likely to reduce recovery rates you’ve been counting on and harm collection efforts in other ways.
Let’s say you are a lender or lessor who tends to work defaults for several years, and you’ve anticipated collecting 5% of the overall outstanding balance over the next three years. Because of market fallout from COVID-19, your chances of realizing that 5% recovery rate are now dimmer. Far better to sell when charge-off volume increases so your company can attempt to maintain those recovery figures by bringing the anticipated future recoveries forward to offset the growing numbers of non-paying accounts.
Second, defaults could rise significantly after a market tumble, enough to overwhelm your collection staff. The efficiency and cost-effectiveness of collection operations will suffer as your company struggles to get a back-up plan in place.
So here is the point where I tell you about what we do at TBF Financial – commercial debt buying – and why increasing numbers of lenders and lessors are selling their NPLs to us. They are doing this to realize business-as-usual benefits now, and to ensure a smart strategy is in place to help with rising defaults in the future.
Our clients include some of the biggest names in their sectors, and smaller companies too. The list is growing as more lenders and lessors turn to commercial debt selling.
Why are they selling?
Immediate cash – Selling old accounts generates an immediate return at closing. For most lenders and lessors, the best timing is to sell at charge-off, also known as the write-off stage, after the accounts have been worked internally for a while. See our frequently asked questions (FAQs) below for the types of financial products being sold.
Faster collections – Staff can stay focused on accounts that are earlier in the past-due cycle and more likely to be recovered. It’s more efficient and cost-effective for all funders, but especially those with business models that emphasize speed and loan origination.
Future-proof strategy – Sellers can count on a definite return at closing versus taking the risk of diminished returns years from now due to market disruptions. They also have a system in place to help manage rising default volume when it comes.
I look forward to discussing commercial debt selling with you directly, regardless of whether you decide to use our services. We will also price your paper for free, no obligation, as we believe your company cannot make an informed decision about whether to sell until you know what the accounts are worth.
You may also find it helpful to scan our FAQs.
What does TBF Financial buy? We buy all kinds of non-performing commercial accounts, up to four years old from the date of last payment, from online small business lenders, banks, equipment finance companies and merchant cash advance businesses. What we purchase includes loans, equipment leases and lines of credit that have personal guarantees, no personal guarantees, are secured, unsecured, pre-agency, post-agency, pre-litigation, reduced to judgment, etc.
What can my company sell? Finance companies may sell off some products but not others, or they may include all products meeting their criteria. Sellers may base their decision on vintage, such as whether an account is pre charge-off, post charge-off, zero agency or post agency. As mentioned above, our company feels post charge-off is usually the best timing. Lenders and lessors also may decide what debt to sell based on geography (national versus state by state), specialty (Chapter 7 and 13 judgments), out-of-statute (OSS) versus in-statute (IS) (OSS accounts sell for basis points; ISS have the option of being litigated), by quality (prime versus sub-prime), by balance (packaging a specific balance segment versus the entire pool of non-performing accounts) or by pool size (one-off versus pool).
How often should we sell? Our firm will work with lenders and lessors on a single engagement at a time if desired, or multiple engagements over time. Many sellers choose to establish a forward-flow relationship where they regularly sell us non-performing finance products at a pre-approved and agreed upon price.
What steps are involved? At our business, sellers 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 seller signs the purchase agreement, we wire payment. It’s a fast, simple process, but transactions in an established forward-flow relationship move 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? 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 resell the accounts. Our philosophy is that most debtors intended to make good on their promises at the beginning of the transaction, so we want to make repayment a positive experience. That way, the debtor is open to pursuing credit from your company again in the future as a customer in good standing.
Let’s meet. If you’d like to learn more and discuss the unique needs of your company, just reach out to me through my contact information below.
Brett Boehm is CEO for TBF Financial.
He can be reached at email@example.com, phone 847-267-0660 or via LinkedIn.