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TBF Financial Blog

Seller beware: crazy high bids for commercial debt

Posted on May 18, 2022 by Brett

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Selling off commercial debt is a smart, established practice in the finance industry. Banks, equipment finance companies, fintech lenders and merchant cash advance businesses earn fast cash this way on non-performing business loans, leases and lines of credit that have resisted collection attempts. Shedding debt also allows finance companies to focus their collections activity on more lucrative accounts.

But a recent experience reminded me of the risks finance companies take when they accept high bids far exceeding the fair market value of the commercial paper they are selling.

Our company is an experienced buyer specializing in commercial debt. Recently we were one of 13 buyers bidding on a portfolio of charged-off commercial accounts. We based our bid on historical data to determine the fair market value range, then leaned on the high side when setting a price to pay the seller. Unfortunately, the deal was awarded to a buyer that submitted an unusually high bid, one of several questionable bids the sale attracted.

So, we looked into the situation further. The bids ranged from 4.5 cents to 16 cents on the dollar. We knew from historical data that 16 cents was an astronomically high price for the type of paper being sold and was sure to lose significant money for the buyer later. Some other bids were over-the-top, too.

Turns out the high bidders were mostly buyers used to purchasing consumer debt, not commercial. Either they didn’t understand the nuances of the commercial market, or they mistakenly thought they could make up the difference in volume.

You might be thinking, from a seller’s perspective, who cares if the buyer loses lots of money after the sale? Here’s the problem.

Reputable commercial debt buyers make money by offering sellers a competitive price for commercial paper based on its fair market value. They pay sellers the agreed upon amount on the day promised; work professionally with debtors over time to collect as much as possible; and use their own company’s name, not the seller’s, when collecting. They are hoping the debtor will someday be in a better position to do business again with the seller as a customer in good standing.

Buyers quoting abnormally high prices, on the other hand, increase risks for commercial debt sellers in at least three ways.

Reputation-killers – Debt buyers that grossly overbid, especially those inexperienced in dealing with commercial accounts, can get desperate when they figure out how much money they are losing. We’ve seen some resort to unprofessional, strong-arm tactics with debtors, sullying the reputations of the sellers involved.

Deal-breakers – Buyers that win deals based on unusually high bids are more likely to delay payments to sellers or renege altogether because they lack sufficient funds. Sellers counting on the money by a certain date are left empty handed.

Time-wasters – Buyers that submit extremely high bids are unlikely to make the numbers work to complete one deal successfully, much less multiple deals. They are poor bets for establishing a long-term working relationship.

Find a reputable buyer

Fortunately, there are dependable commercial debt buyers serving your industry. Here are a few tips to ensure you are dealing with respected buyers and their brokers.

  • Scrutinize buyers that quote excessively high bids. This increases risks that the deal will go sour pre-sale, during or post-sale.
  • Ask about the commercial debt buyer’s philosophy, collection process, and security procedures.
  • Get references from similar types of sellers.
  • Make sure the buyer will collect debts from customers over time in a professional way, without using the lender or lessor’s name.
  • Ask if the buyer may resell the debt at some point. The answer should be “no.” This enables you to repurchase an account should any issues arise post-sale.
  • Have the buyer sign a non-disclosure agreement (NDA) before providing them with proprietary financial information.
  • When approached by a broker, verify that he/she has a recent working relationship with a specific buyer.
  • Make sure brokers use NDAs to protect all parties’ confidential information.
  • When working with a broker, ask how he/she is going to share portfolio information, who will see it, how the non-performing accounts are going to be collected, and if they could be re-sold at any point. The answer to the last question should be “no.”

If you have questions about commercial debt selling, I am happy to discuss this with you, no obligation, and offer a free valuation if you wish. Our website also explains the types of commercial debt we buy, recommended timing for sales, and our fast process for providing quotes and paying sellers.

Brett Boehm Brett Boehm is CEO for TBF Financial.
He can be reached at, phone 847-267-0660 or via LinkedIn.

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