Several weeks - or even months - have passed since you completed work for your customer, yet your invoice remains unpaid. This frustrating scenario is a constant challenge for growing businesses, as you need the working capital to survive. There are many options to secure your cash flow, some give you access to cash right away and others help you follow up on cash owed that’s not being paid on time. Two ways to solve a problem - but very different solutions.
To begin, you’ll need to understand the difference between invoice factoring and debt collection:
Invoice factoring vs. debt collection
Factoring is a type of accounts receivable financing that converts outstanding invoices due within 90 days into immediate cash for your business.
Collections refer to delinquent invoices that are normally over 60-90 days past due. You’ll be paid only after the collection agency receives payment from your customer. To know which is the smarter option for your business, we’ve outlined a few important differences.
When your business needs immediate working capital, waiting for payment on your invoices is not an option. Being able to count on timely payments is a key advantage with invoice factoring. By working with a reputable factoring company you can be granted access to funds immediately after a standard application and underwriting process. Sometimes this access to funds is just what you need to pay employees, buy equipment or keep the lights on while you get the work done.
With debt collection, receiving payment can take much longer and there are no guarantees. By the time you’ve engaged a collections partner the invoices are typically already 60-90 days past due. You won’t be paid until the debt collection agency receives payment from your customer and there is no guarantee that your delinquent customer will pay, so you may not receive any money. The immediate working capital you receive with invoice factoring allows you to stay on top of your business.
As mentioned above, the timing to obtain funds is very different between invoice factoring and debt collection. The differences in their processes is equally distinct.
Accounts receivable factoring is straightforward. Your business selects the invoices to submit to the factoring company. The factory company then performs due diligence on your customer for debtor credit-worthiness. Once the review is complete, your invoices are approved and the funds are released - sometimes within a day or less.
Debt collection is usually a tedious process which can only be initiated once invoices are 60-90 days past due. The debt collection effort must adhere to the Fair Debt Collection Practices Act and debt collectors typically begin by communicating with the debtor regarding the delinquent debt over the phone. Communication is then followed by written correspondence and frequent reminders to encourage the debtor to satisfy the debt. If these attempts fail then legal action is initiated. As noted above, there is no guarantee payment will be received.
Fees for service are an important consideration factor to every business owner. Factoring companies charge a minimal fee for their services. There is minimal risk for the factoring company because they have performed due diligence on your customer to ensure they are credit worthy.
Debt 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.
Let BAM make running your business easier
At the end of the day, managing cash flow is the critical factor in building your business. BAM has been helping businesses free up their cash flow with invoice processing. One-click funding and approvals in under 24 hours gives our customers immediate access to working capital. Call us today to learn how we can help you.