Why Do Companies Purchase Debt?

On the surface, the idea of buying debt sounds like the worst idea ever. Why pay to have someone now owe you money? However, what is actually being sold isn’t just the debt. It’s the interest principal, and other fees that can be collected upon payment or the collateral used to secure the loan. The total household debt in the US is around 13 trillion dollars when all consumer debt like credit cards, student loans, and mortgages are tallied up. Buying debt can be a good and highly profitable investment for companies, providing they do it smartly.

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Positive Return

Buying debt is similar to buying stocks in that the buyer is looking for a positive net return. This means that debt has a tangible market value, but that value depends on the specific type or source of debt.

High-end real estate debt will be like buying Apple Stock while “stale” (old and basically uncollectible consumer debt) are the penny stocks and are often sold to collection agencies for a tiny fraction of its original worth. It isn’t uncommon for a debt to be sold from one company to another.

Tradable Commodity

Debt, as a tradable commodity, comes in multiple forms such a bonds (treasury, municipal, corporate), private lending which is often a semi-informal but legally binding agreement between two individuals, and debt factoring.

Debt factoring is when a business sells past due account receivables off, usually on debts they have given up any hope of collecting on. These are mainly business to a business transaction, but everyday people can buy or sell debt as well.

Diversity

Buying debt can be a good way for a company or individual to diversify their holdings, or even invest. Treasury bonds are a guaranteed way to make money. While they don’t offer the dramatic profits like a hot stock in a bull market, they are as safe as it gets when it comes to investments. And, they aren’t going to go the way of Enron.

Buying mortgages on a property, especially directly from the owner, is an easy way to invest in real estate. Either the buyer now owns a valuable piece of property, or they can turn around and sell it later at a profit.

One popular way to buy and sell real estate is through promissory notes. Not only is it relatively easy, but it’s also an excellent way for a seller to convert a non-liquid asset into cash.

A promissory note is an agreement between a buyer and seller that lays out the value and cost of a property and the payment terms. This is a popular alternative for people who want to cut out using a real estate agent or banks. And while informal, they are legally binding contracts that can also be traded.

Let’s say I wanted to sell my promissory note on a house or commercial property that was in my name. What should I do? The best option is to sell it to a reputable company that has experience handling these sort of transactions. Larger institutions will have the cash on hand to get the seller their money and on to better things.

FG Editorial Team
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