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Debt sales on a forward flow basis – transparency as a key for a sustainable solution

Unpaid receivables tie up considerable resources in companies. This does not only concern capital, which could often be invested more sensibly elsewhere. Processing non-performing receivables also generates significant costs in accounts receivable management, particularly in companies supplying a large number of private customers on a daily basis. The continuous sale of receivables can be the decisive piece of the puzzle for a successful overall strategy in receivables management.

Accounts receivable management: pragmatic is not always

In the face of daily challenges in accounts receivable management, companies often rely on pragmatic solutions. However, these are not always sustainably economic! If, for example, outstanding receivables are not consistently processed, but quickly written off after an ineffective dunning process, profitability is negatively affected. In this way, companies are also sending their customers the wrong signal, which spreads very quickly nowadays. As a result, the payment behaviour of their customers can deteriorate further or new customers with bad payment behaviour can be attracted.

The key to success: involve partners when appropriate

But how can you resolve the challenges of receivables management on a sustainable basis? Preferably with a comprehensive solution consisting of preventive risk management and effective accounts receivable management. The latter can be outsourced to a reliable partner as part of a trustee relationship. Or companies rid themselves of the effort by selling their receivables and at the same time reducing their tied capital. Depending on individual circumstances and requirements, the sale can be made after several weeks or months, during which the company initially executes the dunning process itself or through the partner company. In particular, the continuous (e.g. monthly) sale of overdue receivables provides for sustainable benefits in terms of cost and liquidity.

Transparent pricing in partnership

In order to achieve a sustainable solution, it is essential to focus on pricing in particular. A fair price agreement for both partners is the basis of a long-term partnership. The key word in this context is “transparency”. The company and its potential buying partner should initially have a joint view on the influencing factors that determine the value of receivables to be sold continuously. This includes, for example, information about the:

• underlying transaction from which the receivables regularly result
• sales channels used
• risk management process
• expected receivable amounts as well as
• accounts receivable management process prior to the planned regular sale date

The companies themselves should demand transparency from the potential buyer with regard to the evaluation results of their receivables portfolio. It is particularly important for the continuous sale of receivables that companies get a valid impression of whether their potential partner has correctly identified and assessed the influencing factors. There is nothing more frustrating for a selling company than if the agreed price turns out to be too high for the buying partner and needs to be significantly reduced after only a short time. It may even be necessary to start searching for a sustainable solution all over again.

Your world is changing! Are your solutions adapting efficiently?

It is in the nature of things that during a continuous sale, the value of a receivables portfolio can change successively considering the wide range of influencing factors, both negatively and positively. Therefore, in the interests of a sustainable solution for both partners, I recommend incorporating mechanisms in the sales and purchase agreement that allow the purchase price to “breathe” efficiently in both directions. This prevents the need for frequent coordination efforts. Last but not least, annual meetings to review the developments in the receivables portfolio and to align on operational issues help make sure that the partnership runs for as long as possible to the satisfaction of both parties.

We at Arvato Financial Solutions stand for sustainable solutions, which we implement together with our clients in the spirit of partnership and professionalism, and which we adapt to changing requirements as needed. Depending on our clients’ needs, we provide both single or combined solutions in the areas of:

• risk and fraud management
• payment methods
• white label dunning
• recording the subledger
• collection
purchasing overdue accounts receivables and non-performing loans (NPL)

Get informed about the details of our offer or contact us directly.

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