What is the Difference Between Invoice Factoring and Debt Collection?
Table of contents
- What is the Difference Between Invoice Factoring and Debt Collection?
- Invoice factoring versus the debt collection process
- How Does Debt Collection Work?
- How Does Invoice Factoring Work?
- The Benefits of Factoring vs the Bad Debt Collection Process
- How Bankers Factoring Provides Bad Debt Protection
- What is Non-Recourse Factoring?
Invoice factoring versus the debt collection process
When running a business, being paid on time is essential to keeping operations working at full capacity and enabling opportunities for growth and expansion. When days, weeks, and even months pass without payment from your customer, your cash flow suffers. Slow, delayed payments are a frustrating problem that your small business is likely familiar with.
Both pursuing invoice factoring and working with a debt collector are financial tools for receiving payment from your customer. It is important for you to understand the differences between the two and which suits your situation better, enabling you and your business to make informed decisions on your financial health.
How Does Debt Collection Work?
When the due date on your net 30 to 90 day invoice is 60 days past the due date, and your customer has still not paid the invoice despite your efforts, going to a debt collector can often be a last resort in this situation.
In the most common way debt collection works, a collection attorney or agency will reach out to your customer themselves and attempt to get your customer to pay you. If successful, they keep a portion of what they collect from the customer. However, because it is a last resort scenario, these fees often run high. It’s also not a guarantee that the debt collector will be able to get the payment from the customer at all for your bad, unpaid invoices.
How Does Invoice Factoring Work?
Invoice factoring or invoice financing turns good B2B and B2G invoices into same-day working capital. You will also hear the term receivable financing. Instead of recovering payment from 30-90 day invoices that are past their due dates, invoice factoring buys your current 30-90 day invoices or open accounts receivables.
When your business has invoices on 30-90 day payment terms, it’s frustrating having to wait for a payment. After all, you want to be able to get your cash now. Invoice factoring addresses and remedies this issue.
Read more about bad debt protection through accounts receivable factoring.
An invoice factoring company like Bankers Factoring will buy your invoices and provide a 80-93% cash advance against the invoiced amount in a quick and simple manner. The factoring company will then take over the accounts receivable management and collect the payment from the customer themselves. And once we collect the payment, the remaining balance or earned factoring reserve will be issued to you minus a small factoring fee.
Invoice factoring is an accessible and reliable process that bridges gaps in cash flow, and provides the benefits of working capital now rather than later.
Learn more about invoice factoring.
The Benefits of Factoring vs the Bad Debt Collection Process
Comparing invoice factoring to debt collections is not a real situation. A factoring company buys good invoices from credit-worthy customers while a debt collection agency typically attempts to collect from your financially struggling customers.
Timeline and speed
When you use debt collection services, the debt that collectors deal with is old debt that is long past due. Once you hire these services, there is no guarantee for how long it will take. Moreover, there is a chance that they may not be able to even be able to collect the debt at all.
A/R factoring companies deal with new debt, meaning invoices that are not yet past their due date in the payment terms. Factoring companies buy your invoices, give you a cash advance, and then collect payment from customers themselves. Hence, a concern of when your client is paying is gone because you get your cash advance right away. Another pro is that invoice factoring has a remarkably quick turnaround. And when working with Bankers Factoring, once we set up your account, we can provide same-day funding.
Learn about how factoring companies buy accounts receivable.
Fees and costs
Because this is a last resort solution, and the alternative is not being paid at all, the fees associated with debt collectors can vary widely, often reaching up to 25-80%. Debt collectors work with your riskiest near-bankrupt customers, and so the fee reflects this risk.
As invoice factoring deals with customers that have been vetted by the factoring company and the risk is much lower, invoice factoring fees are also much lower in turn. Factoring itself has some of the lowest fees of any financial tool. Factoring costs with Bankers Factoring run from .9-1.6% per 30 days, with low industry rates and zero hidden fees. We also offer your business a unique sliding factoring cost scale that lowers fees for your business as you grow.
Read more about the costs associated with invoice factoring.
How customers are dealt with
When working with a debt collector, this process could be confrontational and could potentially frustrate your customer. Not all debt collection agencies use aggressive tactics, and many use integrity and civility, but it is always a risk that is run. Many customers will not want a call from a debt collector either way.
Turning over bad, outstanding invoices to a debt collector is seen as the “nuclear option”.
However, when working with Bankers Factoring, we will always use our famous Bankers’ light touch with your clients. We will treat them with respect, professionalism, and politeness, never using confrontational tactics. Since 1998, our owner-employees have ensured that your customer is as happy as you are, treating them as if they were our own and working to maintain positive and strong business relationships.
How Bankers Factoring Provides Bad Debt Protection
When businesses are looking to resort to working with a debt collection agency, the ultimate goal is to get paid and avoid racking up bad debt. When working with Bankers Factoring, we use a special type of factoring called non-recourse factoring that provides protection from bad debt.
Please read credit insurance versus bad debt protection.
What is Non-Recourse Factoring?
There are two types of factoring companies: recourse and non-recourse factoring. Bankers Factoring is a non-recourse factoring company, and we use this more rare type of factoring. With non-recourse factoring, if your client does not pay, we will absorb this loss, taking on this risk and allowing your business to put worries of non-payment to the side. We take on any credit risk and risk for bad debt.
A need for debt collection often arises when your invoice’s due date is past and the customer has not paid. With non-recourse factoring, because we absorb any risk of non-payment, you avoid all the circumstances that can lead to needing debt collection. And the worry of acquiring bad debt is eliminated.
Non-recourse factoring from Bankers Factoring, thoughts of debt collection become the stuff of the past. With bad debt protection, no credit risk, improved cash flow, reliability and security, accessibility, easy-to-understand agreements, low costs, and no hidden fees, Bankers Factoring will allow your business to unlock your true potential to grow and thrive with a total A/R management solution.