The Challenge
A mid-stage Canadian fintech lender had built a successful consumer installment loan product, growing originations rapidly over a three-year period. The company's underwriting models performed well on a portfolio basis, but the natural byproduct of rapid growth was an expanding pool of defaulted accounts that accumulated faster than the internal collections team could process them.
The company had approximately 22,000 accounts in default, representing $45 million in face value. The accounts were 12 to 24 months post-charge-off, sitting on the balance sheet as impaired assets. The internal collections team, which had been hired to handle early-stage delinquency, lacked the specialized expertise and infrastructure required to efficiently recover on deeply aged accounts.
The timing was critical. The company was preparing for a Series B fundraise, and prospective investors had flagged the defaulted portfolio as a concern during preliminary due diligence. The charged-off receivables inflated the asset side of the balance sheet in a way that obscured the company's true operating performance. Investors wanted to see clean financials that reflected the company's origination and servicing capabilities, not a growing backlog of unresolved defaults.
The company's CFO also wanted to establish a sustainable, ongoing channel for disposing of future defaults rather than allowing them to accumulate quarter after quarter. A one-time portfolio sale was necessary, but a longer-term structural solution was equally important.
Our Approach
We recognized that speed was the primary constraint. The Series B process was already underway, and the company needed the transaction reflected in its next set of financial statements. We structured our engagement to run on an accelerated timeline without cutting corners on diligence.
The data tape arrived in a non-standard format, which is common with fintech lenders whose data infrastructure is built for origination and servicing rather than portfolio sales. We worked directly with the company's data engineering team to map their fields to our standard intake format, resolving field-level discrepancies within 72 hours. This collaborative approach avoided the delays that typically arise when a buyer sends back a data tape with a list of questions and waits for responses.
Our underwriting analysis segmented the portfolio by origination vintage, loan size, geographic distribution, borrower credit profile at origination, and days since last payment. The segmentation revealed that approximately 35% of the portfolio consisted of accounts with strong contact information and prior payment history, suggesting above-average recovery potential. This informed our pricing and allowed us to present the seller with a competitive bid that reflected the portfolio's actual characteristics rather than applying a generic pricing model.
Structuring the Forward-Flow Component
In parallel with the spot portfolio negotiation, we proposed a forward-flow agreement under which the company would sell us newly charged-off accounts on a monthly basis at a pre-agreed pricing framework. The forward-flow pricing was structured as a formula tied to account characteristics, specifically the borrower's credit score at origination, loan balance, and months since charge-off, giving both parties pricing certainty without requiring monthly negotiations.
The forward-flow structure addressed the CFO's concern about ongoing portfolio hygiene. Rather than allowing defaults to accumulate and then negotiating a bulk sale every 12 to 18 months, the company could now transfer accounts shortly after charge-off on a predictable schedule. This kept the balance sheet clean on an ongoing basis and provided a small but steady revenue stream from the monthly sale proceeds.
We drafted the forward-flow agreement in parallel with the purchase and sale agreement for the spot portfolio. Both documents were negotiated simultaneously, and both were executed at the same closing. This parallel-track approach saved approximately two weeks compared to negotiating the agreements sequentially.
The Result
The transaction closed 38 days after we received the initial data tape. The company removed $45 million in charged-off receivables from its balance sheet and recorded the sale proceeds as realized revenue in the quarter preceding its Series B investor presentations.
The impact on the fundraise was immediate. With the defaulted portfolio removed, the company's financial statements presented a cleaner picture of its core lending operations. The balance sheet no longer carried the overhang of impaired assets, and the income statement reflected the sale proceeds. The company's CFO reported that investor feedback on the financials improved significantly compared to the preliminary conversations that had occurred before the portfolio sale.
The forward-flow agreement went into effect the month following the close. In its first year of operation, the company transferred approximately $12 million in newly charged-off accounts through the forward-flow channel, keeping its balance sheet current and avoiding the accumulation pattern that had created the original problem.
The transaction also served as a reference point for the company in subsequent conversations with institutional lenders and warehouse facility providers, demonstrating that it had a mature, tested process for managing credit losses across the full lifecycle of its loan portfolio.