Managing lessee debt in the time of Covid

The concept of selling debts, of course, is not new, but whereas the acquisition of large, consumer debt portfolios is de rigueur, the acquisition of portfolios of commercial debt – and leasing debt in particular – is not so prevalent.

So how does it work? In simple terms, there are ‘buyers’ and ‘sellers’. The debt ‘buyer’ values a tranche of lessee debt at anything between (typically) 5 per cent to 50 per cent of its face value. Based on its valuation, this is the amount that the ‘seller’ receives at completion. The value is determined by a number of different factors: it may be the account has not been paid but the company is not insolvent; the lessee may have stopped their payments but the debt is secured, perhaps against a personal guarantee; it might even still be a paying account to an agreed repayment plan where the lessor is seeking to de-risk. All of these factors, alongside the age of the debt and the credit profile of the lessee will have a bearing on the price paid.

Once the leasing debts have been acquired, the responsibility of collecting the outstanding balances rests with the purchaser. They will use a range of skills and credit reference agency data to determine the appropriate servicing strategy (i.e the collections techniques most likely to result in a successful outcome for all parties). It is those skills and insight, also, that will identify any vulnerable customers, allowing forbearance and breathing space where required. Of the money that is collected, the purchaser shares a proportion of the collections it achieves, which can be as much as 50%, with the amount remitted to the client on a monthly basis.

In terms of regulation, some buyers opt to be authorised by the Financial Conduct Authority (FCA), which places Treating Customers Fairly (TCF) at the core of their business. Some have gone even further: Azzurro Associates, for example, has also received Interim Registration to the Business Standards of the Lending Standards Board, setting the benchmark for TCF in the recovery of commercial and consumer debts.

This does not mean, however, that it will not consider taking action against those who clearly have the means to pay, but for whatever reason are failing to engage in an amicable contact strategy. In such examples, and as a last resort, legal action may be required, and a combination of bureau data and the expertise of a panel of preferred collections partners help to ensure only the right cases are selected for litigation.

It is probably fair to say that there has never been a more important time for businesses to be able to extract value from their unpaid debts. As more businesses fail to pay their suppliers, companies further up the supply chain need to make sure they don’t run into liquidity problems.

The outgoing Interim Small Business Commissioner Philip King, whose office champions fair payment practices and supports businesses looking to resolve payment disputes, said that "….at times like these we need creative ideas".

Commercial debt purchase – and the emergence of a new genre of debt management solution – is one such ‘creative idea’ that is likely to have traction long into the future.