Debt Collection vs Invoice Factoring

When it comes to collecting payment from customers, businesses have a few different options to consider. Two common options are debt collection and invoice factoring. Debt collection involves hiring a third party to pursue payment on overdue invoices, while invoice factoring involves selling outstanding invoices to a third party in exchange for immediate payment.

Both options can be effective for businesses that are struggling to collect payment, but they have different costs and benefits that businesses should consider. In this article, we’ll explore the differences between debt collection and invoice factoring and help you decide which option is best for your business.

Which of these are the smarter option? Are there hidden implications you should be researching before making your final decision? The answer is a resounding yes. There are big differences that separate invoice factoring and debt collection, and we believe you should understand them fully before choosing either one.

Difference between Debt Collection and Invoice Factoring

You would use a debt collector for a very different reason to that of an invoice factor. The latter involves current unpaid invoices (no older than 30 days old), whereas debt collection revolves around invoices that are over 60 days past due.

• Debt collection

It may be time to finally check in with a debt collection agency if you remain underpaid after a couple of months.

• Invoice Factoring

If you enjoy receiving timely payment for your work instead of relegating your receivables to the bad debt file, you’ll want to connect with a reputable invoice factoring company; there are many to choose from online.

One of the advantages of working with a trusted company, such as us here at Invoice Funding, is that we’ll not simply factor your invoices; but we’ll also offer numerous back-office solutions, such as payment services, ensuring you receive payment on time for the work you complete. This means you’ll be getting the best of both worlds.

The funding timeline

There is a difference in the time it takes a debt collector and a factor to get your payment to you. So, the question you should ask yourself here is: “How quickly do I want to get paid?” How fast you can get your hands on cash can be a huge game changer in the world of business.

• Debt collection

You’ll receive payment, but only after the collection agency has been paid by your customer. This can often be a timely process, sometimes not happening at all. This can also somewhat alienate your customer base, as it is a rather aggressive process. Perhaps with all this in mind, you may decide that debt collection agencies aren’t right for your venture.

• Invoice Factoring

With factoring, you just sell your invoices at a small discount and receive instant money for your business. How quick does it actually come in? You get compensated before the factoring organisation receives any cash from your client— ordinarily inside 24 hours.

The fees attached 

Paying to be paid may seem like a strange concept, but it is sometimes needed for the modern-day business owner. Payment conflict wouldn’t exist in an ideal world, but here we all are. If you are tired of the back and forth between yourself and your customers, perhaps it is time to make a change.

• Debt collection

Debt collectors come with hefty fees attached to them, which is one of the main reasons businesspeople are put off using them. The fee can be as much as 25% to 30% of the invoice total, which admittedly does beat giving up 100% of the cash, but there are better options out there.

• Invoice Factoring

Getting paid for the work you do should not be the most difficult part of your job, in fact, it shouldn’t present any form of difficulty at all. Invoice factoring can be a great solution, though it is certainly not free of charge. However, you are paying for fantastic benefits that you won’t be able to get elsewhere.

You will receive immediate payment from your factor of around 70% or more, followed by the remaining total, minus a fee as soon as the full payment is collected from your customer.

Conclusion

Debt collection and invoice factoring are two options that businesses can consider when they need to collect payment from their customers. Debt collection involves hiring a third party to pursue payment on overdue invoices, while invoice factoring involves selling outstanding invoices to a third party in exchange for immediate payment. Both options can be effective for businesses that are struggling to collect payment, but they have different costs and benefits.

Debt collection may be more appropriate for businesses that have a few overdue invoices and want to maintain control over the collection process, while invoice factoring may be a better option for businesses that need a more reliable source of working capital and are willing to give up some control in exchange for immediate payment. Ultimately, the best choice will depend on the specific needs and financial circumstances of the business.