Are you struggling to collect debts? Instead of trying to collect arrears yourself you could sell company debt and let a professional collect it for you.
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- Can you sell your company debt?
- The types of debt that can be sold
- Advantages over traditional forms of debt collection
- Are there any costs involved?
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Can you sell your Company Debt?
Selling debt your company is owed relatively simply process. First of all you decide which debts you want to sell. You do not have to sell all your outstanding debts. You can maintain your relationship with clients who are paying regularly and on time.
The debts you have identified are then assessed by a specialist purchaser. If they feel they can be off assistance you assign these to them for a nominal amount of £1. You will receive additional consideration when the debt is recovered.
The purchaser then takes steps that to recover the money that is owed. This is through legal means including negotiation and if necessary litigation.
Once a company has sold a commercial debt it can be written off. VAT bad debt relief can then be claimed.
The types of Company Debt that can be sold
A company can consider selling a range of different types of debts. These might include:
- Unpaid goods and services invoices and trading debts
- Commercial rent arrears owed by companies
- Unsecured loan debts including bridging loans
- Small Claims Court debts
- County Court Judgment debts
There is no limit to the value of debts which can be sold. Generally speaking debts of between £3000 – £50,000 are ideal for this solution. However it may be possible to include debts of less than £3000.
Typically the debts will have been outstanding for between 6 months and a year. However they could be older as long as they have not be Statute Barred.
This service is only relevant for commercial debt. In other words owed by another company. Debts owed to a company by individuals cannot be collected in this way.
Advantages of selling company debt over traditional debt collection
Free up Management Time
The debt collection process can be both time consuming and costly. If your company is small it is unlikely that you have the time or expertise to ensure that bad debts are paid. After a debt is sold the purchaser takes on all collection activities and associated costs. You can get on with the business of running your company.
Individual debts can be sold
The debt sale process allows a company to cherry pick the debts it wants to sell. It does not have to sell its whole invoice book. Unlike a factoring arrangement this allows it to maintain its relationships with creditors who do pay on time.
Improve Cash Flow
If you sell company debt your company can gain access to cash which would never otherwise have been collected. Timescales are difficult to predict but in certain circumstances money can be collected within 2 months.
Claim VAT bad debt Relief
Once a debt is sold the company can write off the debt and claim VAT relief. There is an input tax recovery in relation to the original supply dependent on the VAT liability of it.
There is no VAT to declare on the sale of the debt. In addition the seller does not adjust its bad debt relief claim when it later receives a share of the monies received. The money received is additional consideration for the sale.
If the seller uses cash accounting there is no adjustment to make as the VAT bad debt relief is automatic. If the seller uses invoice accounting the VAT previously declared on the unpaid invoice can be reclaimed.
What does it cost to sell Company Debt?
The company will not face any up-front costs. The debts are assigned to the purchaser for £1. The purchaser will pay for all associated legal costs of assigning the debt.
All costs of collection are then borne by the purchasing company. If they decide that litigation is appropriate they will fund this
You will then receive a percentage of the debt recovered after cost of collection. This will normally be between 10%-50% depending on the nature of the debt. As a result you can recover a considerable amount of the debt owed compared to the prospect of writing off everything.