When your business' cash flow is tied up in accounts receivable, what are your options? If you have enough working capital, you may be able to wait for 30 - 90 days for payments to come in.  If not, you may need to get your hands on some of that capital immediately. Depending on timing, accounts receivable factoring vs. accounts receivable collections may be better. 

When should your business use factoring? When is a collection agency the best option?

Understand the difference between factoring and collections.

How does Factoring Work?

Factoring is the process of selling or financing your business' invoices or accounts receivable in order to obtain working capital immediately. Factoring companies specifically offer these services in order to help cash-strapped businesses or businesses who can't afford to wait for slow-paying invoices.

The terms 'invoice financing' or 'accounts receivable financing' may also be used interchangeably, however, these terms refer to setting up an established credit line for your business. Financing allows your business to choose which invoices to finance, funds are sent from your credit line, and then, after the client pays, your business makes payments on your borrowed credit plus fees.

When you sell invoices to a factoring company, they pay a large percentage of value of the invoice back to your company and keep a smaller percentage in reserve until your client pays.  For instance, they may buy an invoice for 80%, keep 20% and then, when the client pays in full, they pay your business the final 20% less their factoring fees.

Factoring companies will typically have certain criteria in order for businesses to be eligible, including:

• a maximum due date of 90 days
• due diligence on your clients to see if they have good credit
• that your client pays the remainder of the invoice value directly to them

Factoring services and the percentages used are different, depending on the factoring company, your market, and the size of the transaction.  

How is Factoring Different than Collections?

Invoices that are considered for factoring are usually "fresh", meaning they are not yet due. Some businesses factor invoices so they can receive some sort of payment within 1 business day. Factoring would only be used in the case of clients who will pay on time and have good credit with your business.

Collections often refers to delinquent A/R or bad debt, and is usually for invoices that have become 60-90+ days past-due. Businesses hire a collection agency to recover either delinquent accounts receivable and/or bad debt. There is no guarantee that the clients will pay off the debt but the debt collection company will use more aggressive but legal tactics to collect from your clients. 

With factoring and debt collections, your clients will have interactions with companies other than yours. In some markets, factoring isn't unusual so your clients may not react to news that their invoices are reassigned. 

Which Service is Appropriate for your Business?

If your business has cash flow challenges and needs money immediately, factoring or invoice financing could be a dependable option. Research factoring companies to get a better idea of fees to determine the right fit for your needs.

If your accounts receivable has past due invoices, or clients who can't seem to pay on time, a debt collection agency can help. Not only do debt collections agencies help recover old accounts, some may also offer a way to keep accounts receivable "clean" by helping with collections early.  

Accounts Receivable Clean-up: 

A/R clean-up services typically function as an extension of your back office (first-party collections) to contact customers who's payments are drifting past 60 days. Such recovery efforts typically prompt late-paying customers to pay on time and prevents the need to write-off an account as bad debt. (Saving your business the higher cost of debt collection fees.)

To learn more about which option is right for you, click the button below.
Allow Enterprise Recovery to be the "ER" for your A/R.