Turn a profit from payment defaults? How the forward-flow business works.

Let’s take an energy provider as an example. For this type of company, unpaid invoices arise on a regular basis. After several payment reminders, electricity service may ultimately be disconnected for customers who remain in arrears. This situation is unsatisfactory for both parties, and the company’s internal collection options are largely exhausted by that stage. Nevertheless, the company would still like to recover value from these outstanding receivables. It therefore decides to sell a portion of the unpaid receivables on a recurring basis over a defined period of time.

The company first defines which receivables are to be sold and at what intervals the transactions will take place. It then provides the relevant data relating to these outstanding receivables. This step is crucial because the more comprehensive and detailed the data, the more precisely EOS can calculate the purchase price. “To protect defaulting payer in arrears, all data is anonymized and processed in full compliance with data protection regulations,” says Nicolas Schneider, explaining the process. Pricing these portfolios is a complex process that involves specialists from multiple departments within the relevant local markets, as well as experts from EOS’s risk management team at headquarters.

After a comprehensive data analysis, EOS submits an offer to the energy provider. For example, the parties may agree that EOS will continuously purchase outstanding receivables over a one- or two-year period at a fixed percentage of the face value of the overdue invoice amounts, creating a reliable and ongoing transaction flow. “That requires a high degree of discipline and mutual trust,” explains Nicolas Schneider. “We rely on high-quality data and robust forecasting models covering recovery forecasts, costs, and other key parameters in order to offer a truly accurate purchase price. At the same time, we must be confident that the quality of the underlying data used for our analysis remains consistent throughout the term of the agreement.

After our example company and EOS have signed the contract, the regular purchases can begin. EOS acquires packages of receivables at intervals of one, two, or four weeks. The utility company can write these bad debts off its balance sheet and instead receive predictable liquidity.

The receivables now belong to EOS, with the aim of recovering as much of the outstanding amount as possible. “Our collection strategy is based on the data that we have analysed during our due diligence,” explains Nicolas. “We deliver industry-leading collection performance thanks to a unique combination of human expertise and advanced technologies”.  Naturally, the highest data protection standards and internal requirements are fully complied with.

EOS’s goal in collecting the receivables is to achieve the recovery rate assumed in the pricing calculation. “That is the basis for being able to offer our clients a good price in the long term,” Nicolas explains.  “At the same time, we communicate fairly with defaulting payers in arrears and work together to find solutions such as installment payment plans.”