Conducting due diligence on debt buyers involves a comprehensive assessment of their financial stability, track record, regulatory compliance, and ethical practices, ensuring that you're entering into a secure and reliable partnership. This process is crucial to safeguard your interests and minimize risks when selling your debt portfolio.
Let's assume that you decided to sell a debt portfolio, held an auction among debt buyers or collected bid offers by mail, and even received a reasonable price from potential buyers.
But is it all about the price? How to choose a debt buyer with the most reliable reputation? This article will look at the best practices for checking debt buyers and selecting a debt broker before concluding a deal.
After receiving the price of the three buyers who gave the highest prices for the portfolio, a due diligence package is requested from them. Why three? Because it’s not necessarily the highest bidder who may be suitable for your additional due diligence. Most debt buyers already have a package of documents, including debt buying and debt collection licenses, which the buyer already has, SOC2 certificates, operational, collection and data breach policies, certificate of insurance, incorporation documents, and others.
Background verification is one of the critical elements of the verification process. To check the company's background, we recommend using the following services:
Mistakes in collecting debts are inevitable, and to cover these mistakes, you need to have sufficient insurance coverage. The recommended threshold is $ 10 million.
Request trade references to learn about the previous experience of buying a debt portfolio. An approximate sample of the email is located below:
Picture 1. Example of the email for trade references
Engage the company's attorney to check any government requests or consent orders and have the company/officials/owners have ever been prevented from conducting business.
If you sell auto notes, it makes more sense to sell to debt-buying companies who know how to work with such debt, or if you sell PDL accounts, it’s a different practice than auto accounts, for example. The only place where you can be less strict is the sale of real estate, as they are much less regulated
To sum up, after completing these six steps, you will be able to gather a complete picture of the reputation of buyers of your debts, their experience, and how they cover risks through internal controls and insurance. And already based on the collected information, decide with whom you want to conclude a contract for the sale of debts.