When a commercial debt is overdue and in-house effort has stalled, a business typically faces two options: sell the debt to a buyer at a discount, or engage a recovery firm to pursue it on a commission basis. Neither is universally better. The right choice depends on the age of the debt, the quality of the documentation, and how much uncertainty your cash flow can absorb.
How debt purchase works
A debt buyer acquires your receivable outright, typically for between 5 and 40 cents in the dollar depending on age, documentation, and the debtor's profile. The transaction is clean: you receive cash immediately, the risk transfers, and you have nothing further to do with the account. The buyer then recovers the debt for their own account.
The discount is steep, and it reflects the buyer's uncertainty. On older, poorly documented or disputed accounts, the discount can be severe — sometimes below 10 cents.
How commission-based recovery works
Under a no-collection, no-commission arrangement, the recovery firm pursues the debt and charges a percentage of what is actually recovered. If nothing is recovered, there is no cost. You retain the receivable, bear the ongoing risk, and receive the net amount if recovery succeeds.
Commission-based recovery typically returns more than a sale — but only if the account is recoverable. An account that cannot be collected returns nothing, which a sale would at least have monetised.
The key variables
Age matters most. Accounts under 90 days are usually better candidates for recovery. Beyond 180 days, the recovery rate drops sharply and a sale may return more on a risk-adjusted basis. Documentation also matters: a debt supported by a signed credit application, clear invoices and acknowledgement of the debt is far more attractive to a buyer — and far more recoverable — than a debt with thin paperwork.
Consider also your business relationship with the debtor. If the customer may trade again, a recovery handled professionally preserves more than a sale to a third party at a discount.
A practical test
Ask what the debt would sell for. If a buyer quotes you 20 cents in the dollar, that implies they expect to recover at least 40 cents after costs. Commission-based recovery on a well-documented account in the right age band should return you more than 20 cents. If no buyer will make an offer, that is data too.
If you have a ledger of aged receivables to evaluate, speak to Merion — we can help you assess which accounts are worth pursuing and which have reached their natural end.