Factoring Unpaid Invoices vs. Using Collection Agencies
When a company’s invoices go unpaid, the default reaction for many is to turn to a debt collection agency after 60 days of waiting. The company then has to wait for the collection agency to secure the money owed before getting paid themselves; meanwhile, a quarter or more of their profit is lost in paying collections fees. There is another way to settle the debt, however; for faster funding and decreased loss in revenue, companies should consider factoring their invoices rather than turning straight to collections.
How Invoice Factoring Works
It works in the following manner: businesses that are owed a debt sell these accounts receivable to be factored. The 3rd party factoring company analyzes the trustworthiness of the debtors, and assuming that goes through okay, the business owed receives a cash advance within 24 hours of submission. This cash advance can be up to 95% of the invoice dues, depending on the market and debtor trustworthiness. The company that factored the invoice then collects payment and pays the business owed the rest of their dues, minus a fee for services (usually around 5 %.)
Invoice Factoring Vs. Collections
One major difference separating a factor situation from collections is the timeline; factoring companies only accept receivables within the first 30 days while collections pursues payment for debts 60 days or older. Another difference is that with collections, the business owed may only receive payment after collections has received it from the client. On the other hand, factored debt is paid for immediately, allowing freer cash flow and more open opportunities for the business owed. It should be noted that factored invoices are not counted as debt on business records, so there’s no need to pay any kind of interest or deal with any of the formalities that go along with debt.
No Pressure Financing
Additionally, there is no pressure on the business owed in being approved for factored debt. The approval depends on the debtor’s credit and track record. The invoicing business also gets to keep more of their profits by choosing to factor, because the fees are so low; they lose more money by choosing to go with debt collections as the collections fees are much higher.
In summary, factoring is different from debt collections because the business owed doesn’t need to lose a good chunk of their profit in obtaining their dues. They also get paid faster by selling their receivables, and the pressure of approval is off the business and on the debtor. By choosing to factor, businesses can be doing themselves a big favor, both short term and in the long run.