Debt buying is a growing industry offering lucrative returns to investors, but it also requires a keen understanding of finance, regulation, and risk management. For those willing to navigate the complexities, debt buying can be a highly profitable venture. In this guide, we will cover everything you need to know about how to become a debt buyer, from setting up your business structure to sourcing and purchasing debt portfolios and managing the legal and financial challenges that come with it.
What Is a Debt Buyer?
A debt buyer is an individual or a company that purchases delinquent or “charged-off” debts from an original creditor at a discounted rate, with the goal of collecting on that debt for profit. Creditors, such as banks, credit card companies, or service providers, sell off unpaid debts when they believe the chances of repayment are low. These portfolios of bad debts are sold at a fraction of their total value. The debt buyer takes over ownership of the debt and becomes entitled to collect the full amount owed from the debtor.
Common types of debt purchased by debt buyers include:
- Credit card debts
- Medical debts
- Auto loan deficiencies
- Student loans
- Payday loans
- Utility bills
The reason creditors sell these debts is simple: recovering money from delinquent accounts is costly and time-consuming. For a company like a bank, it often makes more financial sense to sell the debt at a loss, freeing up resources to focus on more profitable ventures.
Debt Buyers vs. Debt Collectors
It’s important to distinguish between debt buyers and Debt Collectors. A Debt Collector works on behalf of a creditor to collect money from a debtor but does not own the debt. In contrast, a debt buyer owns the debt outright. This distinction is crucial because it changes the dynamics of the debt collection process. Debt buyers have more autonomy in how they pursue collections, which can either increase the chance of profit or expose them to additional risks.
How Does Debt Buying Work?
The process of debt buying typically follows these steps:
- Purchase of Debt Portfolio: A debt buyer purchases a portfolio of delinquent debt, which is often a collection of delinquent accounts from various individuals, at a significantly reduced rate. For example, a portfolio of £1 million in unpaid credit card debt might be sold for £100,000.
- Debt Collection Process: After purchasing the debt, the buyer can attempt to collect the full amount owed, using either in-house collections or outsourcing to a third-party collection agency.
- Legal Action: In some cases, debt buyers may opt to pursue legal action against a debtor, especially if the debt amount is large. Court proceedings can lead to wage garnishments, bank account levies, or liens on property if the judgement is in the buyer’s favour.
- Profit: Debt buyers make a profit by collecting more than they paid for the debt. For instance, if they purchase £1 million in debt for £100,000 and successfully collect £300,000, they make a £200,000 profit.
This business model offers high potential rewards but is not without risk. Many debt portfolios contain accounts that are difficult or impossible to collect on, which is why due diligence is critical.
How Debt Buyers Make Money
Debt buyers generate profits by purchasing debts at a deep discount and then collecting on those debts. For example, a debt buyer might purchase a portfolio of consumer debts worth £1 million for £100,000. Even if they only recover £300,000, that represents a 200% return on their investment.
Debt buyers typically see varying rates of return based on the types of debts they purchase:
- Fresh debt (debt that has recently become delinquent) is more expensive but has a higher chance of recovery.
- Aged debt (debt that has been delinquent for a long period of time) is much cheaper but harder to collect.
The amount a buyer collects can depend on a variety of factors, including the economic climate, the age of the debt, and the debtor’s financial situation.
Deciding on a Business Model for Debt Buying
One of the most important decisions when becoming a debt buyer is to define your business model. There are several types of debt to choose from, and each has its own risks and rewards. Here are some common categories of debt you may want to specialise in:
- Credit card debts: Typically a large part of most debt portfolios. The high volume of transactions makes this a common debt type for purchase.
- Medical debt: This can often be bought at a steep discount due to the complexity of healthcare billing and the tendency of medical providers to write off outstanding debt.
- Auto loan deficiencies: This involves debts from auto loans, often after repossession of the vehicle.
- Student loans: These can be difficult to collect, especially if government-backed, but private student loans are often sold.
- Payday loans: These short-term loans carry high interest rates, and the accounts that go delinquent are usually sold off relatively quickly.
- Utility bills and telecommunications debts: These types of debts are often small and low-value but come in large volumes.
Each category has different levels of risk and potential for profit. New debt buyers should consider focussing on one niche before expanding into other areas. Doing so allows for specialisation and the development of expertise, both of which are critical in making informed decisions.
Formalising Your Business Structure
Once you have decided on the type of debt you want to purchase, the next step is to formalise your business structure. In the UK, you’ll typically choose between a Limited Liability Company (LLC) or a corporation. Each has its pros and cons:
- Limited liability companies: This structure is simpler and more flexible, offering protection from personal liability. It is often the best choice for small or medium-sized debt-buying businesses.
- Corporation: Corporations are more complex but offer additional tax advantages, especially if you plan to reinvest profits or take on investors.
Your business structure will affect your tax obligations, legal responsibilities, and ability to raise funds, so it’s essential to consult with an attorney or accountant before making a decision.
Obtain Licenses and Permits
Debt buying is a heavily regulated industry, and in the UK, it is overseen by the Financial Conduct Authority (FCA). To legally operate as a debt buyer, you must:
- Apply for FCA authorisation: This process can be time-consuming and requires demonstrating that you have the necessary knowledge and resources to comply with FCA regulations.
- Adhere to data protection laws: The General Data Protection Regulation (GDPR) imposes strict rules on how you handle personal data, and breaches can result in severe penalties.
- Maintain transparency: The FCA requires debt buyers to treat consumers fairly and provides guidelines for how debts can be collected.
Failing to comply with FCA regulations can result in fines, the loss of your license, or even criminal charges, so this step is critical.
Ethical Considerations and Joining Regulatory Organisations
Ethics play a significant role in debt buying, as the industry is often criticised for aggressive collection practices. To maintain credibility and avoid legal issues, it’s important to align your business with regulatory bodies and industry associations. Joining these organisations can also provide valuable resources, such as education and networking opportunities.
Consider joining the following:
- Consumer Financial Protection Bureau (CFPB): While a US-based organisation, the CFPB provides guidance and regulatory updates that can influence international practices, especially for cross-border operations.
- Receivables Management Association International (RMAI): This body advocates for ethical practices in debt buying and offers certifications and educational opportunities.
- Better Business Bureau (BBB): In the UK, being a member of similar trusted organisations can enhance your reputation and show potential clients or business partners that you adhere to high standards.
Securing Software and Data Protection
Handling sensitive financial data requires robust security systems. As a debt buyer, you will have access to personal details such as names, addresses, Social Security numbers, and bank account information. To protect this data, you must invest in secure software that complies with GDPR regulations.
Key security features to look for include:
- Encryption: Ensures that data remains unreadable to anyone without proper authorisation.
- Access control: Limits who within your company can access sensitive information.
- Data backups: Protects against data loss in case of a cyberattack or hardware failure.
Additionally, training employees on data security best practices is critical. The FCA has strict guidelines for how consumer data must be handled, and violations can lead to heavy fines and reputational damage.
Conducting Due Diligence
Before purchasing any debt portfolio, it’s essential to conduct thorough due diligence. This involves investigating the accounts included in the portfolio to ensure that the debts are legitimate, collectible, and worth the investment. Key steps in the due diligence process include:
- Reviewing the age of the debt: Older debts are harder to collect but are often sold at a steeper discount.
- Checking for prior collection attempts: If previous collection efforts have failed, the likelihood of recovery may be lower.
- Verifying debtor information: Ensure that you have accurate contact details and that the debts are legally enforceable.
By conducting thorough due diligence, you can avoid purchasing portfolios filled with uncollectable debts and increase your chances of making a profit.
Where to Find Debt Purchase Deals
Finding debt portfolios to purchase can be challenging, especially for new buyers. Here are some common sources for acquiring debt:
- Debt brokers: These intermediaries connect debt buyers with sellers, often offering a wide range of debt types.
- Online marketplaces: Platforms such as We Buy Any Debts allow debt buyers to purchase portfolios from creditors, providing a convenient way to enter the market.
- Direct from creditors: Some buyers establish relationships directly with debt sellers, cutting out the middleman and securing better deals.
Each option has its pros and cons. While brokers and online marketplaces offer convenience, they may come with added fees. Establishing direct relationships with creditors can lead to more favourable pricing but requires networking and industry connections.
Conclusion
Becoming a debt buyer offers the potential for significant profit, but it’s a business that requires careful planning, ethical consideration, and a deep understanding of the financial and regulatory landscape. By choosing the right business model, securing the necessary licenses, conducting thorough due diligence, and adopting secure data protection practices, you can build a successful debt-buying enterprise.
If you’re ready to enter the world of debt buying, start by identifying your niche, formalising your business structure, and seeking out debt portfolios that align with your goals. With the right approach, debt buying can be a highly rewarding venture.
At We Buy Any Debts, we understand the intricacies of debt buying. Our family-run business specialises in purchasing bad business debts, offering companies a quick and easy way to improve their cash flow. With no hidden fees and a transparent process, we can help you turn bad debts into immediate cash. Contact us today to find out how we can help your business succeed.
