Method and system for distributing receivables

Abstract

The method and system of the invention is directed to a process for the optional acquisition of receivables. The method of the invention, which may be characterized as an Optional Purchase Commitment (“OPC”) is a process by which a potential grantee, for example a buyer, may pay for the right, but not the obligation, to acquire receivables from a grantor, for example a seller. The OPC process of the invention enables a grantor of such receivables, typically a credit grantor, to estimate the amount of its future receivables and enter into OPC agreements to convey those expected receivables under a fixed arrangement at a specific time in the future to a grantee, for example a buyer. A grantor, a grantee, or a third party acting on behalf of either a grantor or a grantee, or independently, may initiate the OPC process of the invention. The OPC process may be utilized in conjunction with existing marketing processes. The OPC process of the invention provides a time horizon or option period. This time horizon or option period is advantageous for both grantor and grantee. Further, the process of the invention may be used in a third party exchange or clearinghouse, which may be implemented utilizing a computer arrangement.

Description

FIELD OF THE INVENTION [0001] The present invention relates broadly to a method and system for distributing receivables from a first entity to a second entity. BACKGROUND OF THE INVENTION [0002] The extension of credit is a principal financial underpinning to viable contemporary economic models. The extension of credit may be performed either by businesses that produce and sell goods or services, or alternatively, by financial institutions. Credit may be extended to either consumers or commercial entities. The American Collectors Association (“ACA”) currently estimates the amount of U.S. consumer debt to be at $6.3 trillion and growing. [0003] Regardless of the source of financing, inevitably some portion of all credit granted results in delinquency and default. Delinquent receivables, for example, are generally considered to be any type of extension of consumer or commercial credit for. which the debtor has failed to satisfy its obligations under a payment agreement with the credit...

AI Technical Summary

Benefits of technology

[0024] One inefficiency with the conventional bulk sale process involves “holding period risk.” To explain, the market value of individual receivables decreases during the bulk sale holding period because the likelihood of collecting the receivable balances diminishes over time, due to one or more of the following factors: (1) The seller may cease internal or third party collection efforts in anticipation of a bulk sale event, meaning that any contact with delinquent debtors may be lost and any payment activity may diminish. (2) The debtor may file for bankruptcy protection during the holding period, which has the effect of removing the requirement for a delinquent debtor to repay the debt. (3) All states have individual statutes of limitation which specify the amount of time that must pass from the date the debtor defaulted on the debt until the debt is no longer legally collectible, such that, should the debt remain delinquent beyond the length of time specified by the statute, the legal obligation for the debtor to repay the debt is eliminated. (4) Credit reporting agencies are required by federal statute to remove all inactive credit references, including those for delinquent or charged-off debts owed, from a debtor's credit reports after approximately seven years. If the statutory time period expires during the bulk sale holding period and a debtor's poor credit reference is eliminated from the debtor's credit report, the collector loses the leverage associated with credit reports that may motivate a debtor to make fill or partial repayment of the delinquent debt. All of the above lost opportunities reduce sellers' gross collection income and their ability to receive higher competitive sale prices from buyers.

[0026] To illustrate, another inefficiency with known processes involves capital acquisition problems. To explain, the bulk sale process typically only affords potential buyers a matter of days before they are required to commit capital to purchase individual portfolios. Many bidders therefore are either unable to participate in bulk sale offerings because of insufficient time to borrow and / or allocate capital for portfolio purchases, or they are forced to pay more for capital than would be the case under a longer time horizon. Higher costs of capital in turn reduce their ability to pay higher prices to sellers and thus be competitive in the marketplace.

[0028] Another inefficiency with known processes involves reselling limitations. To explain, the bulk sale marketing period severely limits the amount of time available for potential buyers to evaluate portfolio offering information and to arrange for possible resale of select segments of the portfolio prior to funding the purchase transaction. Consequently, resale transactions can only be negotiated after a buyer's actual commitment of sufficient capital to pay the full purchase price for the portfolio in its entirety. Under such circumstances, buyers are required to obtain or allocate more capital than would be necessary if resale transactions could be arranged prior to funding. Current bulk sale processes, therefore, limit the number of potential buyers to only those who have sufficient available capital or low cost lines of credit. The most efficient markets operate when there are minimal restrictions on availability of capital and the numbers of buyers, thereby allowing full participation and competition. The conventional bulk sale resale restraints that are now known tend to reduce the number of buyers and raise their cost of capital. These lower the buyer's ability to pay the highest competitive rates to sellers.

[0030] As described above, another transaction type is the forward flow sale process. The forward flow sale process tends to mitigate, but not eliminate, some of the problems associated with the bulk sale process. For example, the forward flow sale process helps to reduce holding period risk. To explain, the timeframe in which forward flow sale receivables are accumulated and held by a seller prior to delivery to a buyer is materially reduced in comparison to a bulk sale process holding period. For this reason lost collection opportunities are minimized, resulting in potentially higher competitive prices paid by buyers.

[0031] With respect to operational planning and management, again in contrast to the bulk sale process, the ability for forward flow buyers to plan purchases many months or years ahead enhances buyers' abilities to cost effectively manage their internal operations. Improved cost management ultimately results in the ability to pay higher purchase prices to sellers.

Problems solved by technology

It should be appreciated that despite the increasing volume of receivables sales, aspects of both conventional bulk or conventional forward flow sale arrangements can be problematic for both buyers and sellers.

Inherent with this process are problems that limit its efficiency for market participants.

One inefficiency with the conventional bulk sale process involves “holding period risk.” To explain, the market value of individual receivables decreases during the bulk sale holding period because the likelihood of collecting the receivable balances diminishes over time, due to one or more of the following factors: (1) The seller may cease internal or third party collection efforts in anticipation of a bulk sale event, meaning that any contact with delinquent debtors may be lost and any payment activity may diminish.

If the statutory time period expires during the bulk sale holding period and a debtor's poor credit reference is eliminated from the debtor's credit report, the collector loses the leverage associated with credit reports that may motivate a debtor to make fill or partial repayment of the delinquent debt.

All of the above lost opportunities reduce sellers' gross collection income and their ability to receive higher competitive sale prices from buyers.

However, as described in detail below, it should be appreciated that the inefficiencies of the known processes also adversely affect buyers of receivables.

For example, using known processes, a buyer is not provided sufficient opportunity to prepare for a purchase of receivables, and is often excluded from participation in the market as a result.

To illustrate, another inefficiency with known processes involves capital acquisition problems.

Many bidders therefore are either unable to participate in bulk sale offerings because of insufficient time to borrow and / or allocate capital for portfolio purchases, or they are forced to pay more for capital than would be the case under a longer time horizon.

Higher costs of capital in turn reduce their ability to pay higher prices to sellers and thus be competitive in the marketplace.

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