What are considerations in selling debtors account

Company is looking to sell their outstanding debtors to collect cash quicker.

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The managing director has suggested that we should sell our list of debtors to a third party company to raise cash instead of chasing debts using a credit controller.  I have never used this method of collecting cash and have some reservations and questions.

1) Does anyone have any idea what we could collect for each £ outstanding. (The debtors are individuals with I assume a low credit history and not a great deal of funds)

2) If the book debts are sold what accounting entries will need to be made.? I assume we need to adjust the debtor figure, but will we also need to look at the revenue raised on each bill and adjust downwards to reflect the value of the debt received from the collections company.

3) Anything else I would need to think of?

Thanks

Replies (8)

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By bernard michael
13th Nov 2020 15:04

When you say "sell" the debts are you talking about factoring, invoice discounting or the local mafia. Each has there own method of treatment. I seem to recall that this type of query was answered a while ago at great length

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By frankfx
13th Nov 2020 15:38

Cart before horse.

Ask managing director which route he is proposing,or is he just thinking allowed?

When you know the road you are on the acquirer will explain the process and the bookkeeping that follows.

I would be surprised that there are any buyers for book debts as described.

Especially in a Covid 19 ravaged economy.

The need to use debt collection is a sign of poor customer selection, rather than credit control.yes?

Can't customer settle by credit card?

If not, why?
your business model may be questionable at the customer stage.

However many businesses simply budget for an X ,% default, they know the broad customer profile.

Btw The book debt acquirers are not gullible .

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By tom123
13th Nov 2020 15:55

Depends on what is being proposed.

Factoring, invoice discounting, = you would generally set up a 'bank' in your system.
The initial proceeds you would transfer from the factoring 'bank' to your bank. Thus creating an initial loan.

Upon receipts from customers, you process them as normal, but against the factoring 'bank'.

The factoring company will require a reconciliation each month to your whole sales ledger balance.

These things are (relatively) easy to take on, but the funding dries up when sales fall off, and somehow you never get quite back out of them.

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By In a Daze
13th Nov 2020 16:38

You also need to consider if you want recourse or non recourse factoring.Invoice discounting will not help your situation as you will still have to chase the debtors.

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By Paul Crowley
13th Nov 2020 16:47

Daft idea
If a genuine sale then you will get little money
Factoring has always been looked upon as taken up by underfunded businesses

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By paul.benny
13th Nov 2020 17:10

Most debt factoring or invoice discounting is borrowing using the debtor book as security. If you have bank borrowings secured on the trade and undertaking, you'll need to get agreement from the bank first.

Your description of the debtor book sounds like sub-prime. Factors may not be interested in lending against it. If you're talking outright sale, again, few buyers will be interested - and they might give you as little as 10-20% of face value - and will throw back to you anything with defective documentation that would prevent recovery through the courts.

Help us here - what's the nature of your business?

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By Paul Crowley
13th Nov 2020 18:09

Better to get a debt collection company

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By financebod
13th Nov 2020 18:50

Thank you all for your replies. Some very interesting points made. Have a good weekend.

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