When it comes to getting paid for work completed, businesses often turn to factoring companies or debt collectors to facilitate the process. While invoice factoring companies and collection agencies both handle unpaid invoices on behalf of businesses, the two services aren’t exactly the same as they may seem.
Knowing how the processes differ ensures that you not only prevent non-payments but also minimize the costs incurred in the process.
Invoice factoring differs from debt collection in terms of purpose
While invoice factoring involves selling your credit worthy accounts receivable or current unpaid invoices – no older than 30 days – to a factoring company, debt collection deals with invoices that are past due by no less than 60 days.
So, if you are still trying to get paid more than two months after you’ve completed the work, a debt collection agency may be the entity to check in with.
However, if you are simply looking for timely payment for work done – oftentimes for purposes of improving your business’ cash inflow – then you’ll want to seek a reputable invoice factor like www.invoicefinancingaustralia.com.au. Such entities can fund your business on approved invoices as quickly as the next business day.
Different funding processes
With factoring, you get paid before the factor actually attempts the collection of the accounts receivable. This explains why invoice factoring can be such an immediate means of receiving money out of your unpaid invoices.
A debt collection agency on the other hand only gets you paid after they have successfully received payment from the debtor. Depending on the circumstances, this can often be a long-drawn-out process that may involve multiple follow-ups and written reminders, and even legal action if the initial attempts are unsuccessful.
Factoring and debt collection fees are different
On average, a factoring company will charge your businesses a factor fee of about 3 to 7 percent of the total value of approved receivables. The cost of factoring is essentially minimal because factoring companies start by performing their due diligence to establish the creditworthiness of the debtor.
Debt collection agencies, on the other hand, tend to charge slightly higher fees for their work, often anywhere between 25 percent and 30 percent of the debt recovered. This is normally because of the nature of the debt and the risk involved in recovering it.
Factoring applies to current invoices while collection is used for old debts
An invoice factor will only purchase accounts receivable that are considered current – generally within 30 days of invoicing. This means that only newly generated invoices or those billed in the last 30 days will qualify and get approved for factoring.
Anything that is older than 30 days of invoicing falls outside of the factoring threshold, with debt collection agencies as the alternative. Collection agencies take on the debts that are 60 days or older. These are often debts that are leaning towards defaulting.
Do you want to get paid today? Depending on the nature of the debt in question, and armed with the information in this guide, you should now know exactly where to look for the help you need.