When you have unpaid debts, you’re faced with the decision to sell the debt to a debt buyer or engage a collection agency. This choice affects not only your short term cash flow but long term business relationships and risk management. Understanding the differences and benefits of each will make a big difference in how you approach debt recovery.
Short Term Cash Flow
Selling debt gives you immediate liquidity which is critical for businesses growing fast or with cash reserve shortages. When you sell your delinquent accounts to a debt buyer you release trapped working capital into cash. You can then re-invest in your business or stabilise your financial position quickly without the hassle of collecting on difficult accounts.
Risk in Debt Recovery
Engaging third party debt collectors or selling debt can reduce the risks in debt collection. For those who sell, implementing robust data security and vetting buyers thoroughly ensures you comply with the Federal Trade Commission and protect sensitive consumer data. Selling to debt buyers within the Receivables Management Association International will also reduce the risk of legal issues and ensure collection practices are industry compliant.
Protecting Consumer Relationships
Outsourcing debt recovery to third party collection agencies or selling it off removes the original creditor from direct involvement in potentially contentious collection activities. This can help maintain positive consumer relationships and protect the creditor’s brand especially in industries where future consumer interaction is likely. By removing themselves from the direct collection process they can avoid alienating customers forever.
Certainty and Financial Planning
Selling debt turns unpredictable recovery processes into a single transaction, making financial planning easier. Creditors can value their debt portfolios and decide when to sell based on their cash flow needs and market conditions. This is especially useful for debts like credit card debt, medical bills or automobile loans where recovery can be highly unpredictable.
Creditors Considerations
Creditors must weigh immediate cash against potential longer term returns from engaging collection agencies. While selling debt gives you quick cash and reduces risk, engaging debt collectors allows you to potentially recover more of the original debt over time at the cost of ongoing involvement and consumer friction.
Selling debt and collection agencies have their place in the debt buying industry. Creditors need to consider their overall business model, the type of debt they have and their ability to manage ongoing collection activity when making this decision. Working with law firms and understanding the legal implications of debt collection and sale is also key to compliance and consumer protection.
For more information and in depth analysis on debt recovery check out my blog Jeffery Hartman’s Credit and Collections Blog. Here you’ll find tips and strategies to improve your debt recovery and make informed decisions in the credit and collections industry.