Selling a customer's unpaid debt to a debt purchaser
Selling a bad B2B debt to a debt purchaser gets it off your books quickly, but you receive only a fraction of its face value, you give up any chance of recovering the rest, and an outright sale also rules out VAT bad debt relief on that debt. It is usually the last step, after cheaper recovery routes have failed or when the cost of chasing outweighs what you could recover.
A debt purchaser buys an unpaid business debt outright for a lump sum well below face value, then recovers what it can for itself. It suits old or hard-to-collect debts where chasing costs more than it returns, but an outright sale ends VAT bad debt relief on that debt and usually ends the customer relationship. More detail + scope
This page covers
When to sell an unpaid business debt to a debt purchaser, how a debt sale works, what you give up, the VAT position, and the recovery routes to compare first
Not covered here
Selling a current invoice for cash through spot factoring (see /unpaid-invoices/sell-unpaid-invoice/), consumer debts, and legal advice on a specific dispute
How a debt sale works
You approach a buyer of commercial debt, or a collection firm that also buys debts, with the invoice, the contract or order behind it, proof of delivery and your chasing history. The buyer prices the debt on how likely it thinks recovery is: the age of the debt, whether it is disputed, the customer's financial position and how strong your paperwork is. If you accept, you sign an assignment, the buyer pays you, and it notifies your customer that the debt now belongs to it.
From that point the buyer keeps whatever it recovers. That is the trade: certainty now in exchange for the full value you might have recovered yourself.
When selling makes sense
- The debt is old, your own chasing has stalled and you do not expect to trade with the customer again.
- The amount is too small to justify legal action, but large enough that recovering something matters.
- You need the debt closed off, for example before a sale of the business or year end, and a lump sum is worth more to you than the uncertain full amount.
What you give up, including VAT relief
The biggest cost is the discount: you accept far less than the invoice value. The less obvious one is VAT. Normally, if a customer never pays, you can reclaim the VAT you paid over once the debt has been unpaid for 6 months after the later of the due date and the supply date and you have written it off, under HMRC VAT Notice 700/18. The same notice says relief is not available on a debt that has been sold under a valid legal assignment. On a VAT-registered invoice, that reclaim can be a meaningful part of what is at stake, so compare the two before you sell. Our guide to HMRC bad debt VAT relief covers the claim itself.
Routes to compare first
- Statutory late payment interest. On business-to-business debts you can charge interest at 8% plus the Bank of England base rate, set out in GOV.UK's guidance on late commercial payments. See our late payment interest calculator.
- A letter before action, the formal final warning before court. Our letter before action guide explains what it must contain.
- A small claims or county court claim, started online through GOV.UK. See our guides to small claims and county court judgments.
- A statutory demand for undisputed debts, explained on GOV.UK and in our statutory demand guide.
- If the customer is insolvent, a debt buyer will price that in heavily; read what to do when a customer enters administration first.
Stopping this happening again
If late-paying customers are a pattern rather than a one-off, invoice finance with bad debt protection moves some of that risk to a provider before an invoice goes bad, and credit checks on new customers cut it further. Our guide to invoice finance bad debt protection explains how it works, and the unpaid invoices hub covers every recovery option.
What is a debt purchaser?
A debt purchaser buys an unpaid debt from you outright, pays you a lump sum well below its face value, and then tries to recover the full amount from your customer for itself. Once the sale completes, the debt is theirs and you have no further involvement or upside.
Is selling a debt the same as invoice factoring?
No. Factoring funds invoices that are expected to be paid, usually on a rolling facility, and the factor pays you most of the value upfront. A debt sale is for debts that have gone bad: the buyer is pricing in the risk that little or nothing will ever be recovered, so the price is far lower.
Can I still claim VAT bad debt relief if I sell the debt?
Not if the sale is an outright (absolute) assignment. HMRC's VAT Notice 700/18 says relief is not available on a debt that has been sold or factored under a valid legal assignment, so weigh the VAT you would reclaim against the price you are offered before you sell.
Will my customer know I sold their debt?
Yes. The buyer will give your customer notice of the assignment so that payment is made to them, and they will pursue the customer directly. If you want to keep trading with that customer, a debt sale usually ends the relationship.
What should I try before selling a debt?
A formal letter before action, statutory late payment interest and compensation, a small claims or county court claim, or a statutory demand if the debt is undisputed. Each keeps the full debt in your hands, and several cost little to start.
Founder & Managing Director, Muswell Rose, founder and PSC of Best Business Loans Ltd
Adam is the founder and managing director of Muswell Rose and a founder of Best Business Loans Ltd, the company behind Market Invoice. He spent over three years as managing director of Penny, a UK invoice finance business, and his career runs through insurance, mortgages, commercial finance and fintech lending. He writes the Market Invoice library.
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