Recent business periodicals list a collection agency business as a hot startup. The debt buying segment of the Collection Industry has seen incredible growth over the past decade. The traditional collection agency business collecting on a contingency basis continues to perform, but the margins have been stretched in recent years.
The four largest publicly traded debt buyers include Encore, Asta Funding Inc., Asset Acceptance Capital Corp. and Portfolio Recovery Associates Inc. In 2010, together they purchased nearly $20 billion in distressed debt and expected to recover three times what they spent buying that debt according to the Association of Credit and Collection Professionals, a trade group.
Encore in 2010 recorded revenue of $382 million and profits of $49 million. Impressive growth and profits have not been realized by all. The price of buying charged off debt ran up before the mortgage debacle. Prices went as high as 14 cents of the original dollar in debt. Prices are typically in the 3 to 5 cent range depending on the age of the debt and how many times the debt has changed hands. More recently prices have settled down to prices more in line with levels seen before the market collapse in 2007.
Making a reasonable return on purchased debt is not for the inexperienced. Evaluating and purchasing good paper at reasonable price requires research. Recently, the number of buyers has increased to the point that the cost of buying receivables makes the margin less attractive.
The debt buying industry started in the 1990s. Early adapters made some great returns. The guys that were doing traditional collections on a contingency basis for some of the big banks and finance companies started to purchase large portfolios of charged off accounts. They loaded thousands of accounts into their collection databases, sent out several letters, made dozens of calls on their autodialers, levied suits in the courts, and then would credit report on accounts with judgements.
In time, many of those accounts that were credit reported would begin to reap some returns. The process would work, but would require due diligence and patience. The process worked for the few that had presence in the industry, a well defined process, and technology to work the accounts.