While Australia is a leading global economy, many Australians find themselves in situations where they have small business debt they are struggling to repay.
To put it in a clearer context, in terms of the interest of small business debt purchasers buying your debt, it is worth noting that Australia has one of the highest levels of household debt in the world.
According to the Reserve Bank of Australia, as of December 2021, the ratio of household debt to disposable income in Australia was around 186%.
This means that the total amount of debt owed by households is almost twice the amount of their disposable income.
Further, household debt has grown steadily since the 1992, signalling what might be a pattern that could be observed into the future.
The reserve bank of Australia also has collected data showing that between the years of 1997, and 2022, financial liabilities have also increased.
Additionally, the Reserve Bank of Australia has also confirmed that:
- Housing debt-to-income ratio: This chart shows the trend in the ratio of housing debt (i.e., debt related to mortgages and other housing loans) to disposable income in Australia over time. As of December 2021, the ratio was around 141%, which means that households in Australia owe around 1.4 times their disposable income in housing debt.
- Debt service ratio: This chart shows the trend in the ratio of debt payments to disposable income in Australia over time. As of December 2021, the ratio was around 10.5%, which means that households in Australia are using around 10.5% of their disposable income to make debt payments.
- Housing credit growth: This chart shows the trend in the growth of housing credit (new loans issued for housing) in Australia over time. As of December 2021, housing credit growth was around 5.5% year-on-year, which means that new housing loans are being issued at a moderate pace.
This data provide a wholistic over view of the financial situation of households in Australia and highlights the high levels of household debt.
Outside of the personal finances of Australians, there exists some debt pressures for the private sector, with the Reserve Bank of Australia reporting that:
- Credit to the private sector: There is a trend in the amount of credit extended to the private sector in Australia over time. As of December 2021, the total amount of credit outstanding was around $3.8 trillion, with most of it being extended to households for housing.
- Household credit growth: There is a trend in the growth of household credit ( such as loans for households) in Australia over time. As of December 2021, household credit growth was around 3.9% year-on-year, with most of it being for housing loans.
- Business credit growth: There is a trend in the growth of credit extended to businesses in Australia over time. As of December 2021, business credit growth was around 0.7% year-on-year.
- Deposit rates: Australian Reserve Bank data shows the trend in deposit rates offered by banks in Australia over time. As of December 2021, the average deposit rate for households was around 0.4%, which is very low.
- Exchange rates: Australian Reserve Bank data shows trend in the value of the Australian dollar relative to other major currencies over time. As of December 2021, the Australian dollar was worth around 73 US cents, which may impact on trade options.
- Australian Reserve Bank data shows a comprehensive view of the credit and money market in Australia, highlighting the high levels of credit extended to households for housing and the low interest rates offered on deposits. The data also shows that business credit growth is relatively slow, which could have implications for economic growth, which may further lead to financial stress for Australians. Finally, the data on exchange rates provides a snapshot of the relative value of the Australian dollar on the global market.
Additionally, Australians also have to repay the Higher Education Loan Program (HELP) debt, which is a government loan scheme that helps students pay for their tertiary education.
This debt is repayable through the tax system once the student’s income reaches a certain threshold.
The amount of HELP debt that Australian’s have can have an adverse effect on the other levels of debt Australian’s may need to take on, in the sense that existing debt generally reduces one borrowing capacity, and may the repayment of certain loans more challenging.
In light of the above mentioned forms of debt many Australians have, some might consider selling some of the debts they have to debt purchasers.
It is generally advisable that before doing so you seek advice from an accountant, or perhaps a financial planner. Finance professionals might be able to advise of alternative options.
With the intention of recovering the full amount owed from the debtor, debt purchasers negotiate discounts with original creditors like small banks, business service providers, banks, credit card companies, or other lenders to purchase their debt.
Debt buyers purchase debt for a variety of reasons, including:
- Profitability: Debt buyers purchase debt at a discount, usually for a fraction of the full face value, frequently mere cents on the dollar. They then make an effort to recover the full amount owed from the debtor, keeping the surplus as profit.
- Specialization: Managing and collecting debt is a speciality of debt purchasers. They have the infrastructure, know-how, and resources necessary to successfully collect on a sizable number of debts. They can diversify their holdings and use their knowledge to increase returns by purchasing debt.
- Risk reduction: In order to lower their own risk, original creditors may sell debts to debt buyers. They can recoup some of the debt and shift the risk of non-payment to the debt buyer by selling the loan.
- Efficiency: Using cutting-edge technology and tried-and-true procedures, debt purchasers can collect on a huge number of debts at once. They can benefit from economies of scale and expedite their collecting operation by purchasing debt.
- Market need: Debt buyers purchase debt because there is a need for it in the market. In search of a return that is unrelated to the stock market or other conventional assets, investors may be ready to purchase debt as an alternative investment. Because to this, debt buyers have an eager market for the debt they buy.
Debt is an inevitable part of business operations. At some point, a small business may find itself in a situation where it is owed money by a customer who is either unable or unwilling to pay.
In such cases, small businesses can either continue to pursue the debtor on their own or consider selling the debt to a debt purchaser.
Selling debt may seem like a drastic step, but it can actually have several potential benefits for small businesses. In this article, we will explore some of the ways small businesses can benefit from selling their debt to a debt purchaser.
Now you understand why debt is purchased, and understanding that is perfectly legitimate and not generally a risk to your business, the below points highlight the advantages to why you might choose to sell your debt.
Selling debt can be a strategic decision for small businesses, as it presents several benefits. These advantages include immediate cash flow, reduced administrative costs, reduced risk, improved credit score, and access to expertise and resources.
The immediate cash flow benefit is particularly significant for small businesses that rely on timely payments to maintain cash flow and pay their bills. By selling their debt to a debt purchaser, small businesses can receive a lump sum of cash upfront, which can be used to meet their financial obligations.
Reduced administrative costs are also a valuable benefit, as debt collection can be a time-consuming and expensive process. By selling the debt, small businesses can avoid the costs associated with keeping track of overdue accounts, sending reminders, and following up with customers. This frees up their resources to focus on other areas of their business.
Reduced risk is another significant benefit, as small businesses that have outstanding debts are at risk of losing that money altogether if the debtor becomes bankrupt or insolvent. By selling the debt, the risk of non-payment is transferred to the debt purchaser, who has the expertise and resources to manage the risk and maximize the chances of recovering the debt.
Improved credit score is also an essential benefit, as small businesses rely on their credit score to secure financing, such as loans or credit lines, to support their growth. Outstanding debts can negatively impact a small business’s credit score, making it harder to secure financing in the future. Selling the debt can improve the credit score by removing the outstanding debt from the books and allowing the business to focus on building a positive credit history.
Finally, selling debt can give small businesses access to expertise and resources they may not have otherwise. Debt purchasers specialize in managing and collecting debts, so they have advanced technology, access to credit bureaus, and established relationships with debtors, which can improve the chances of recovering the debt.
It’s essential for small businesses to carefully consider whether selling their debt is the best option for them. However, in many cases, it can be a useful tool to manage cash flow and reduce risk. It’s crucial to work with a reputable debt purchaser who operates ethically and transparently, ensuring a positive outcome for all parties involved.