Banks, credit card issuers and other lenders sometimes extend credit to people who are unable or unwilling to repay the money. Rather than simply writing off these loans, creditors can sell the debt to a firm that specializes in recovering as much of the money as possible. A forward flow agreement is a type of contract between a debt buyer and a lender.
The terms of a forward flow agreement allow the buyer to purchase a stated quantity of debt from a lender at an agreed price for the term of the contract. Typical forward flow agreements last three to 12 months, but may be for longer periods. For example, a lender may agree to sell $10 million per month in debt at 15 percent of the face value for a year. The price is set based on how much of the debt the buyer is likely to recover. The buyer benefits by securing a predictable supply of debt. The lender gets the bad debt off its books and converts delinquent receivables into a steady stream of revenue. In addition, lenders cut costs by eliminating fruitless collection efforts.
