Almost every business has money tied up in accounts receivable. For those with adequate capital supply, it’s not such a big deal to wait 30 to 90 days for payment. For some businesses, however, cash flow is intermittent and irregular and waiting is not possible. Two viable options for getting money from accounts receivable that haven’t yet been paid are factoring and debt collection. Factoring is the process by which a factoring company purchases unpaid receivables for cash less a discount, while debt collection is where a third party agency collects old unpaid debts from customers.
There are several major differences between factoring and debt collection:
- The purpose of factoring is to improve cash flow, while the purpose of debt collection is to recover old debt.
- The process of factoring is simple and short and usually results in cash the next business day, while the process of debt collection is often long and involves a delicate balance between aggressive policies and alienating customers.
- The age of invoices is also different, as factoring involves current invoices while debt collection deals with those 60 days or older.
- The fees charged by factoring companies usually run from 3-7%, while debt collection agencies can run from 25-30%.
It is up to individual companies to weigh the options and decide which method is best for their needs. Small to medium sized companies that have seasonal demand or irregular customer payments would benefit more from factoring, while bigger companies would be more likely to use debt collection.
For the full article, see Factoring Vs. Collections: Which is Better for your Unpaid Invoices?