How to Start a Debt Buying Business Model: Operator's Guide

2-10¢Consumer charged-off — cents/dollar

12-20%Net IRR — disciplined debt buyers

24-36moConsumer paper work-out horizon

The Debt Buying Business Model in Plain Terms

2-10¢Fresh consumer paperCents per dollar face — deep discount buy

12-20%Net IRRDisciplined buyer — pricing discipline essential

24-36moWork-out horizonConsumer charged-off — primary paper

USD 7-15MStartup capitalFirst 18 months — licensing + portfolio

EU 2021/2167Credit Servicers Dir.Bank-origin NPLs — servicer auth required

3 critical decision points

1

Portfolio pricing: 5 variables determine returns

(1) Age and provenance — fresh vs tertiary worked paper. (2) Data quality — scrubbed for bankruptcy/deceased/military. (3) Enforceability — CISG/state law. (4) Regulatory environment — debtor residence licensing matrix. (5) Collections capability. Typical: fresh consumer 5-9¢ buys → 12-18¢ recovery over 24-36mo.

2

Where to source: 4 channels

(1) Direct bank/originator — best economics, requires MPSA + audit + state licensing. First-time buyers rarely win. (2) Debt broker platforms — resale paper, 1-3% fee. (3) Forward-flow agreement — monthly commitment at pre-agreed price, 12-24mo. (4) RMAI network (US) / FENCA (EU) — access to direct bank sales.

3

Licensing: most underestimated cost

US: 20-30 state licences ($30-60K annual renewal) + surety bonds ($200K+ collateral) + CFPB Reg.F. California DFPI §100000. NY DCWP. TX Finance Code §392.101. UK: FCA authorisation (FSMA 2000). Germany: RDG §10. EU: Credit Servicers Directive 2021/2167 for bank-origin NPLs.

You have capital to deploy. Banks sell charged-off paper every quarter — their balance sheets require it. Before you bid: the debt buying business model is the most heavily regulated corner of alternative finance. The margin between a profitable portfolio and a write-off is narrower than first-time buyers expect.

US State Licensing Matrix for Debt Buyers

State / RegimeRequirementKey statute

California (DFPI)

Mandatory — consumer + commercial

SB 908 eff.Jan 2022 — first US state to include B2B collectors

CA Fin.Code §100000

New York (DCWP)

NYC agency licence

Administrative Code §20-489 — applies to third-party and debt buyers in NYC

Admin Code §20-489

Texas (SOS)

USD 10K surety bond

Finance Code §392.101 — Secretary of State registration before collecting

Finance Code §392

UK (FCA)

FCA authorisation

FSMA 2000 — debt administration/collecting regulated activity

FSMA 2000

EU (Credit Servicers Dir.)

Servicer authorisation

Directive 2021/2167 — transposed end 2023 — passport regime for EU bank NPLs

EU 2021/2167

Germany (RDG)

§10 RDG registration

Rechtsdienstleistungsgesetz — required even for passive B2B debt ownership

RDG §10

Is debt buying profitable?

Disciplined debt buyers report net IRR 12-20% on charged-off consumer paper. Gross cash-on-cash multiples 1.8-2.4x. Fresh consumer: buy 5-9¢ → recover 12-18¢ gross over 24-36mo. Subtract servicing (25-40%) + legal costs → net return. Single overpriced portfolio erases a year of returns. Pricing discipline at purchase determines everything.