Overview of the Debt Management Industry
The debt management industry helps consumers and business clients deal with severe debt problems that threaten personal bankruptcy (for individuals) or insolvency (for businesses). In principle, bankruptcy or insolvency occur when the individual or business cannot repay its debts and have no choice but to surrender assets and income, in exchange for that debt being forgiven. The debt management sector is an integral part of the Financial Services industry. Expert providers work under different regulatory regimes.
The industry has thrived as private sector debt levels have skyrocketed in Western economies. Credit fuelled booms have led to individuals and businesses borrowing beyond their means. Loose credit conditions and high availability of mortgages, credit cards, loans all contributed to banking failure and a crash in consumer confidence.
The credit crunch has led to a rise in unemployment and fall in demand for products and services. Consequently, business owners have grappled to meet their financial burdens in a prolonged recessionary phase. As credit has dried up, high street banks have turned down a higher proportion of business loan applications and tightened up the covenants of corporate debt agreements.
SME’s have suffered disproportionately compared to larger companies. Large firms can afford to engage a credit controller and may be able to rely on established customer goodwill. Despite the importance of entrepreneurial SME’s to the growth prospects of any economy, many SME's have been forced to consolidate debts using a third party debt consolidation service. Sadly, many owners of failed small businesses who signed a personal guarantee linked to a loan, subsequently faced a personal bankruptcy procedure (such as an individual voluntary arrangement). In order to avoid formal bankruptcy, many owners have used a debt management company to negotiate and execute an informal debt management plan with their creditors.
Some debt management focus on providing business information to help business owners make decisions that help to manage debt and avoid potential debt problems. For example, credit history services and credit information services help to vet potential business customers seeking interest free trade credit. Similarly, specialist repossession services and skip tracing services may be employed when outstanding debtors have absconded or moved away without leaving any contact details.
Some debt management companies provide debt invoice factoring services to assist businesses with cash flow problems caused by unpaid business debts. This involves indebted firms outsourcing or 'factoring' the credit of unpaid client invoices to a third party company. In exchange, the unpaid business debt is settled at the first opportunity. This has the outcome of advancing up cash inflows while decreasing debt collection administration charges. Cash is the lifeblood of any business and enables vital operating expenses to be paid.
Many can help fledgling start-ups operate more efficiently by providing cash flow management services. These can help calculate startup capital, help reduce operating expenses, and construct cashflow forecast models (to anticipate peaks and troughs in sales and cash).
Many debt management companies specialise in debt recovery services and debt collection services. These can assist companies with either personal debtors or business debtors. For smaller firms, a specialist provider can help chase, contact, negotiate and potentially settle outstanding debts in an orderly and professional manner.
The debt management industry has attracted a bad process in countries with advanced economies where financial regulation is slow to catch up with new financial products or marketing ideas. For example, UK Payday loans companies have been accused of making debt problems worse by charging extortionate interest rates and employing dubious advertising.