The Banks Perspective On Collecting Receivables

I recently encountered a small medical practice that closed due to an overwhelming SBA loan wrapped around the business and commercial real estate.  The business assets were sold to a third party who moved down the street and operated through a new entity.

The dead practice had $300,000 in outstanding Accounts Receivable.  We executed a sale of the AR to the buyer of the assets for $5,000…. Thats correct, $5,000 to be able to collect on $300,000… Now pick your chin up off the floor and I’ll explain why this works for both the buyer and the bank.

When we took a look at the AR schedule, 97% of the AR was 90+ days old, so therefore the bank finds them to be non-collectable.  Banks have a very low collection rate when they attempt to collect on AR for a business that has shut it’s doors, so they will only put time effort into receivables that are 60 days old or less, and even then will be lucky to collect 10 cents on the dollar.

Simply stated, if the small business owner cant collect these receivables in a timely manner, the likelihood of those same clients sending payment to the bank of the dissolved business is EXTREMELY slim, and the bank understands that.  When a receivable hits 60 days old, the bank has virtually no chance on getting paid on it, where as a small business owner may still be able to receive payment through direct communication.

Taking this into consideration, and looking back at the deal we had with the medical practice, the bank looked at the AR Schedule and considered less than 7% of the AR as potentially collectable (roughly $20,000) and would anticipate collecting 10 cents on the dollar or less on that amount, roughly $2,000…. All of a sudden our $5,000 offer from the buyer of the assets becomes extremely attractive to the bank and they jumped at the opportunity to close on it, doubling their expected return.

Everyone wins.  The bank increases their expected recovery, and now the new buyer has the rights to collect on ALL of the AR and to be able to determine for themselves what receivables are actually collectable.  If the new buyer is savvy, they will heavily discount the AR that is greater than 60 days old, and will normally collect on any receivable less than 60 days out.  They will easily recover their $5,000 invested, and if done correctly, will collect significant amount more cash that they can infuse into their new business.

This all came from our understanding of how banks work.  We do them a solid favor and bring them a buyer that drastically increases their recovery, while simultaneously giving the new buyer a chance to thrive under their new, debt-free business lifestyle