Liquidating written-off accounts is one of the easiest ways to convert non-performing commercial paper into cash and profits. Let’s face it: despite their most rigorous and thorough due diligence, asset-based lenders will inevitably accrue a certain percentage of unpaid obligations. These are loans and lines of credit that have fallen into arrears, necessitating that the lender write them off. In many instances, these write-offs just sit on the balance sheet, waiting for an opportune time for the lender to deduct them as a loss.

While these write-offs are inevitable, it is not inevitable that they represent a loss or a liability. Today, many asset-based lenders are taking a more proactive—and profitable—approach toward their written-off accounts: selling them. As an integral part of their annual business plans, converting written-off accounts into cash by selling them can provide a steady stream of revenue.

Quite simply, it’s found money and found profits. I know this firsthand because my company, TBF Financial, has exclusively served many of the largest asset-based lenders by purchasing their portfolios of non-performing commercial loans and lines of credit that were written-off. It’s truly one of the simplest, easiest ways for asset-based lenders to improve their bottom line.

Buyers of written-off commercial accounts are experts at reaching higher by identifying collectible accounts and successfully collecting on them. Because of their expertise at recognizing value, they are able to offer aggressive pricing for the accounts they buy. Since collecting on non-performing commercial paper is all they do, they often know better than the holder of the account how much can be collected. This knowledge means the price they can pay a seller reflects their expertise at discerning value—an expertise that ensures sellers obtain the highest possible return from their written-off accounts.

Good Reasons to Sell Bad Debt

Today’s challenging economic climate means no stone is being left unturned in an effort to enhance revenue. After all, cost reductions, enhanced efficiency, and economies of scale can only yield so much benefit. Asset-based lenders are finding themselves under increased pressure to explore every possible source of revenue to enhance their bottom line.

It should perhaps come as no surprise, then, that selling written-off accounts is materializing as exactly that hidden resource. There are many significant benefits to selling write-offs and, frankly, no liabilities.

First, selling write-offs is the easiest way of converting them into revenue and improving cash flow. Any lender that is seeking ways to enhance its bottom line can benefit from the immediate boost it gains from selling its written-off accounts. Sellers who have completed an initial sale of their write-offs and seen how easy it is to realize cash on these assets often choose to initiate a proactive arrangement to automatically sell their written-off accounts. The regular revenue from the sales then becomes a line item in their budgets that they can count on going forward and can utilize to book new loans.

Second, since these assets have been written off the lender’s ledger as having no value, the purchase price is a “recovery” for accounting purposes; therefore, the total purchase price goes directly to the seller’s bottom line as profits. While many asset-based lenders will do end-of-the-year sales of their write-offs to increase their annual profits, an increasing number of lenders are finding that selling their write-offs throughout the fiscal year provides a steadier stream of revenue. For revenue generation through selling non-performing paper, there’s never a better time than the present, as written-off accounts don’t appreciate with age.

Third, this strategy of selling written-off accounts as soon as they are so designated has the added benefit of ensuring the best possible return on them. Even if the lender chooses to liquidate the asset that secured the loan, any remaining deficiency balance still has value to buyers. Buyers of write-offs always weigh all of the remaining value in the paper—whether or not there’s still an asset behind it—and pay a price based on that value. The only factor that a seller needs to be aware of is time: again, a written-off account is never going to appreciate in value; it can only go down. That’s why many sellers of non-performing paper often create an ongoing relationship with their buyer to generate revenues from the immediate sale of their written-off accounts.

So what’s involved in terms of processes for sellers who want to liquidate their charge-offs?

Getting Started

Selling written-off accounts is a very easy process. The seller prepares the basic information on the pool of non-performing accounts that is needed for review by the buyer. The buyer assesses this information and offers a price for the written-off pool of accounts. If the price is acceptable, a purchase/sale agreement is prepared and the transaction closed. The entire transaction can be completed in a very short time, with a wire payment of funds to the seller made on the date of closing.

But, again, the key strategy for sellers is to initiate a sale sooner rather than later—ideally, as soon as they write off an account and realize they could utilize the proceeds of a sale better elsewhere. Successful lenders have learned that guaranteed cash now is always better than the diminishing possibility of some payment later. In today’s tight market, what asset-based lender can afford to pass up a revenue stream generated, almost literally, from nothing?