Overdue accounts receivable are a common problem for small businesses. In fact, more than one-third of Americans have at least one unpaid bill in collections.*
Overdue collections can sink your business’s financial stability, and the longer you wait, the less likely they are to be paid. You can attempt to collect unpaid bills yourself, or you can use a service like a specialized debt collection attorney or agency.
If you have several publicly listed collection accounts open, you may be contacted by a debt buyer. Knowing exactly what a debt buyer is and how they operate can help you make an informed decision about whether or not they represent a viable option for your business.
What Is a Debt Buyer?
People often confuse debt buyers with collection agencies, but they are not the same thing. A collection agency tries to collect a debt on your behalf. If the debt is collected, the collection agency keeps a predetermined percentage of the money collected and you receive the remainder.
A debt buyer is an organization that purchases outstanding debts from creditors who have not successfully collected. In most cases, these organizations pay only cents on the dollar for the debts they purchase.
Debt buyers differ from collection agencies in that they purchase your debt from you rather than contracting out their services for a fee or percentage. After the transaction is complete, the debt buyer legally owns your debt. They will not make any profit unless they can collect; but if the debt buyer successfully collects on the debt, they will keep all of the money collected.
Debt buyers also sometimes come in the form of “factoring companies.” Factoring companies only buy current receivables that are within 30 days of invoicing. By selling your debts to a factoring company, you are paid before a collection attempt, whereas a collection attorney or agency will pay you after they successfully retrieve an overdue payment.
After you perform a service for your customer, you send an invoice to a factoring company. The factoring company gives you a cash advance on that invoice and then collects in full from your customer. The factoring company then pays you the collected invoice amount, minus a fee. So, you are essentially borrowing against you accounts receivable, for a fee or percentage, on the assumption that they will be collected.
The Debt Buying Process
When a creditor wants to sell off debts, they are typically packaged into portfolios based on their age, type, and the location of the debtors. These portfolios are then marketed to debt buyers and sold to the buyer who makes the best offer.
As an example, assume that you have outstanding accounts amounting to $10,000. You have made multiple attempts to collect the debts, and you do not think you will be able to collect. If you choose to sell the debt to a debt buyer, you will receive pennies on the dollar up front.
For example, if the debt buyer pays 10 cents on the dollar, you will receive a total of $1000 for the debts, and you will write off the remainder. The debt buyer will keep any money they can recover.
Debt Buyer Regulations in Arkansas
The state of Arkansas requires debt buyers to be licensed by the state. To obtain licensure, debt buyers must take the following steps:
- Pay a licensing fee.
- Show proof of experience in the collection business.
- Provide business and character references.
- Show proof of surety bond in an amount ranging from $10,000 to $25,000, depending on the number of employees in the agency.
In Arkansas, debt buyers must be licensed to buy debts in the state to differentiate them from collection agencies.
Selling your debt to a debt buyer is usually a last resort for past due accounts—and usually only for accounts you a certain cannot be collected. Selling accounts to a debt buyer is just one of several collection options available to businesses struggling to collect past-due accounts.
If your business needs the help of a debt collection attorney, contact McHughes Law Firm at 501-376-9131 for a free legal consultation.