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Factoring Vs. Collections: Which is Better For Your Unpaid Invoices?

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Factoring companies and debt collectors each provide unique services to help businesses get paid for work that has been completed. At first glance, factoring companies and collection agencies seem similar as they both provide a service to businesses to help them collect on unpaid invoices. However, it’s important to know that they differ in processes. It’s crucial, as a business owner, to understand how factoring and collections work and how these two services differ to help you prevent and minimize non-payments.

Factoring Vs. Collections: Which is Better For Your Unpaid Invoices?

 

Definitions

Factoring
A transaction where you sell your credit worthy accounts receivable or invoices to a factoring company to get paid quickly on money owed, less a factor fee.

Debt Collection
A process when a third-party agency takes on the debt of your business and attempts to retrieve money owed through a series of letters, phone calls and other legal processes to receive payment in full.

Five Key Differences

1. Purpose
Every business will at some point experience poor cash flow. Working with a factoring company helps businesses to improve the inflow of cash by selling their accounts receivable to get paid on completed orders or work rather than waiting past 30, 60 or even 90 days. Factoring companies can usually fund a business on approved invoices as soon as the next business day.

While factoring is a form of alternative financing to improve working capital, working with a collection agency is an attempt to recover an old debt.

2. Process
The factoring process is simple. When you submit or sell an invoice to a factoring company, it will perform its due diligence to ensure the invoice (and debtor) is credit worthy. The factoring company verifies and confirms the details of the invoice with the debtor to ensure its validity. Once the debtor confirms the details of the invoice, it is approved and your business is funded by the next business day.

Debt collection is usually a tedious process. A debt collector must be delicate in recovering money owed to you and not ruin existing business relationships. The debt collection effort must also adhere to the Fair Debt Collection Practices Act. Debt collectors typically begin by communicating with the debtor regarding the delinquent debt over the phone. Further communication is followed by written correspondence and frequent reminders to encourage the debtor to satisfy the debt. If these attempts fail then legal action is initiated. If the debt collector is successful in collecting on money owed, it funds its client less the agreed collection fee.

3. Current Invoices vs. Old Debt
Factoring companies purchase receivables that are considered current. Qualifying invoices range from newly generated invoices to those that have been billed in the last 30 days. On the other hand collection agencies will take on your debts that are much older – 60 days or older.
- Factoring – current receivables that are within 30 days of invoicing
- Collections – debt older than 60 days

4. Fees
Factoring companies, on average, charge small businesses a factor fee of 3%-7% of the value of approved receivables. Because factoring companies perform their due diligence to ensure the debtor is credit worthy, the cost of factoring is minimal. Collection agencies, however, charge an average fee of 25%-30% to recover on old and unpaid debt. Collection fees are greater due to the age, risk and nature of the debt.
- Factor Fee = 3%-7%
- Collection Fee = 25%-30%

5. Funding
It is important to understand the funding processes of factoring versus collections. This will help you better plan your budget and expenses. Factoring allows you to receive money that is owed to you before there is an attempt by the factoring company to collect on unpaid invoices. A collection agency can get you paid on old debt after the debt collector successfully receives payment.
- Factoring – get paid before collection attempt by factor.
- Collections – get paid after collection agency successfully receives payment.

Talk To A Professional

Your business is unique, as are your challenges. Whether you need factoring to improve your cash flow or seek out the services of a debt collector to collect on a delinquent debt, talk to a professional in their respective fields to see if their services can help your business.

This guest post was provided by Ramir Rodriguez, a Business Development Officer with Treasure Valley Factors. He has helped businesses understand how factoring can help them get paid on completed work and grow their business. For more information on factoring please visit the blog Factoring Helps. Don’t forget also to connect with Ramir on Twitter and LinkedIn and “Like” Treasure Valley Factors on Facebook!

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5 Responses to Factoring Vs. Collections: Which is Better For Your Unpaid Invoices?

  1. Mary Kaplan says:

    Thank you for a very informative post. There are clear differences between factoring and debt collection which you explained well. Does it make sense for a company with current debt collection issues to go to a debt collector? It seems like the lower fees and upfront payments offered by factoring companies would make factoring more appealing. Are there any claim quantity barriers with factoring companies which would prevent smaller companies from using factoring?

    • Thanks for your comment Mary. Factoring companies are not debt collectors therefore they will only take invoices that have been billed recently. For instance, our company will take on invoices with a brand new client that’s been billed within the last 30 days.

      And as for smaller companies using factoring, it depends on the factoring company and their services. Ask a factoring company if they have “minimum volume” requirements. This means are you required to submit a certain dollar amount or number of invoices in order to use their factoring services. Our company does not have a minimum volume requirement – use us only when you need us.

      Hope this helps!

  2. I think collection is better for unpaid invoices. You made a good difference between factoring and debt collection. Nice article!

    • Ramir Rodriguez says:

      Thanks Debt Collection Sydney! Too often many business owners I speak with confuse us for a debt collection agency so I wanted to make the differentiation. Ultimately choosing the right option will depend on the small business.

  3. It is also worth potential clients considering that with factoring the credit control service provided by the factoring company can have a value in itself to offset against the cost i.e. if you no longer need to employ your own credit controllers as the factoring company undertake that role. Factors are also good at improving the debt turn of a business which again can create a further cash flow advantage for a client

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