Every week, we’re hearing from executives with asset-based lenders and lease finance companies. Business conditions have become much more difficult in recent months. Unfortunately, some are finding out the hard way that the levers they expected to use to enforce collections and recover assets in default may not be as effective as they should be. The results range from hard-to-collect past due balances to unenforceable recovery provisions.

To avoid these kinds of unpleasant surprises, the most successful lenders often take proactive measures to safeguard loan and lease portfolio performance. Simply stated, these companies focus on the basics. By examining their administrative and clerical functions, examining their documentation, and ensuring adequate monitoring of UCC activities and lien perfection requirements, they’re able to manage portfolio performance much more effectively to mitigate unexpected friction when collecting or recovering.

Working with and speaking to lenders and lease finance companies across the country, we’ve noted five essential practices that top-performing companies use to ensure that the effects of difficult times are minimized.

1. Comprehensive Record-Keeping: The Backbone of Collections and Recovery Success

By implementing an advanced record-keeping system that captures detailed borrower and lessee information, and regularly updating records to ensure accuracy and completeness, these lenders enable swift and effective decision-making during the loan lifecycle and recovery processes.

2. Enforce Collection and Asset Recovery Provisions: Securing Payment or Collateral

Some lenders have taken steps to review and update collection and asset recovery provisions in their loan and lease agreements to strengthen the institution's position in cases of nonpayment and default. These updates often include the ability to pass along costs incurred for collections or recovery activities. These lenders also establish clear communication channels with borrowers and leasers to apprise them of asset recovery procedures in advance. In some instances, they’re engaging legal experts to draft enforceable asset recovery clauses that comply with local regulations.

3. Vigilant Monitoring of UCC Activities: Safeguarding Interests

By assigning a dedicated team to monitor UCC (Uniform Commercial Code) filings and automating the monitoring process, lenders ensure timely and accurate submission and receive real-time alerts on any changes or lapses in UCC filings. By conducting periodic UCC searches to assess the priority of existing liens, they’re also protecting the company’s interests in case of insolvency or default.

4. Perfecting Liens: Ensuring Optimal Security

By conducting an internal review of existing liens and/or engaging professional lien services companies to identify any gaps or errors in lien perfection, lenders can avoid legal or jurisdictional conflict that could impair their ability to recover collateral. Internally, many of the same lenders are educating employees involved in the lien perfection process to adhere to best practices and regulatory requirements.

5. Merger and Acquisition Considerations: Navigating Complexity

Just like every other industry, disruption can create opportunity. As the asset-based lending and lease finance industry responds to today’s challenges, we’re seeing increased M&A activity across sectors. By prioritizing meticulous due diligence of assets during an M&A scenario to assess portfolio quality, buyers can help ensure more favorable deal economics. In some instances, it may be appropriate to collaborate with legal and financial advisors to evaluate potential risks and liabilities associated with the acquired portfolio.
Following an acquisition, it’s wise to have a plan to integrate acquired portfolios seamlessly into existing collection and asset recovery processes while maintaining compliance.

Conclusion: Navigating Towards Portfolio Success

As the post-pandemic, liquidity-fueled pandemic gives way to a more challenging financial environment, lenders and lease finance companies should consider optimizing their contractual, administrative and clerical functions to safeguard their loan and lease portfolios. Here at ACS, we’re urging our clients to embrace proactive strategies to strengthen their collections and asset recovery capabilities, ensuring continued success even in a slowing economy with tightening credit.