Cash flow is crucial to every business, no matter what industry you are in. When a customer does not pay an invoice under your terms, you may need to turn to a debt collector to retrieve the money. Your business pays a premium for this, but you should get paid for your services. While collection agencies serve a vital purpose to businesses, they are not factors. Learn why factoring is better than debt collections.
What Is Factoring?
When your business extends credit to customers, you have invoices which need to be paid. Maybe you’ve given your customers 60 days to pay the invoice, but you need working capital now. With factoring, you take current accounts receivable invoices to a lender, and sell those invoices. The factor provides working capital for your business and wait for your customer to make good on the invoice. One of the benefits of working with a factor is that they want to preserve your relationship with your account. While they do collect the debt, they are not going to use forceful methods until that invoice has turned into an old debt.
The factor will look at the credit-worthiness of the customer to determine the premium you pay. Generally, this is about 3-7 percent of the invoice. When the customer does pay of their invoice, once the factor receives its money and fees, if there is any left over, it comes to your business. With a debt collector, they take their portion, about 25 to 30 percent, then send you what they’ve collected. Factoring is guaranteed income to your business, while debt collections can take months before you see anything, if you do.
Key Differences
Entrepreneurs may need both factors and debt collectors to keep their accounts in order. However, the process is very different. In accounts receivable financing, the income goes directly into the business accounts for whatever purpose you need it for. Debt collection is not guaranteed. You may never see that money which is owed to you. A factor looks at the current invoices, while debt collectors work on old invoices which are generally over 60 days.
Speak to a lending professional who can help you understand how factoring will work for your business. Non-recourse financing takes the risk off your company, because if the customer does not pay, your organization is not liable. There are multiple options which can help you stay current in the marketplace and profitable when you have opportunities, but don’t have the working capital you need.