You might have worked or provided services to your client who has not paid for quite an extended period, and it seems to be getting out of control. Bills have been accumulating since you need to finance your business activities. After evaluating the best method of getting your payment, you find out that you can consider consulting a debt collector to collect your money. Additionally, you find out that a credible and trusted factoring company could factor your invoices such that you receive your payments and the factoring organization collects the money later for a factor.
Capital Now, based at Calgary Alberta, is a financial organization that plays a crucial role in invoice factoring by ensuring that companies can get quick cash rather than waiting for an extended period for their debts to be paid.
We will help you to understand the difference between the two methods and propose the best alternative for you so that you can avoid incurring excess costs. Here are some critical differences between invoice factoring and debt collection that you should understand.
1. Definition of the Two Terms
Factoring refers to a situation where an organization that is owed by another institution sells its invoices to a factoring organization. The factoring entity then gives the amount on the invoices to the company seeking its debt to be paid. However, it is worth highlighting that the factoring entity will be paid in commission an amount referred to as a factor. The factoring institution will then collect the debts later when the paying party releases payments.
Debt collection is a method of accounts receivable financing that involves using an agent that uses all the means necessary to collect all the debts owed by the organization. The third party agent specializes in collecting debts owed to other companies. Debt collection agencies use strict methods such as legal proceedings, writing series of letters, and constant phone calls to ensure that the party refusing or delaying to pay the debts is forced to pay that amount in full.
The method of compensating third-party debt collectors varies concerning the contract agreed before the process starts. Some may be paid a proportion of the collected debts while others agree on different methods of compensation.
The two methods of accounts receivable financing are undertaken due to different purposes. Your company may be experiencing challenges in cash flow where it needs all the amounts it is owed to be paid immediately so that it is liquid enough to pay its debts as and when they fall due.
To facilitate steady cash flow, the best method of getting your money fast is using a factoring organization. Factoring entities can quickly pay your invoices within one or two business days. However, for your invoices to be paid within fast few business days, your invoices have to be approved by the paying entity.
On the other hand, there are those companies that usually have a vast financial base, and they do not require their debts to be paid immediately, especially if the paying entity is not able to settle the debts quickly. If the debts take too long to settle, the financial accountant may choose to declare unpaid amount as bad debts or use the services of a debt collector to collect the money at a fee.
3. Associated Fees
If you want to incur fewer fees as payments for the services rendered, choosing a factoring organization is essential as they charge fewer fees. These organizations cannot decide to pay or to buy for invoices or for a company they are not sure about their creditworthiness. Recent statistics indicate that factoring organizations only agree to buy approved and verified invoices and they will only do that for a company that has an excellent credit rating. By following these strategies, factoring organizations shield themselves against any eventualities of difficulties in collecting debts.
On the other hand, the fees paid to the debt collection agency are very high and sometimes amount to about 30 per cent of the debt collector. Companies using debt collection agencies resort to a debt collection agency as a measure of the last result because they might have tried all the necessary methods to collect their money. Sometimes the costs involved and the aggressive methods used by a debt collector makes several companies consider other methods of getting their money to avoid destroying relationships between the company and its customers.
Engaging any method to collect your money may depend on the timing of your debts. Factoring method is a simple process that involves getting your money as early as your invoices have been approved and the factoring organization conducts a background check about the paying organization to verify its creditworthiness. You might even get your money on the very day that you rendered your services or you sold your goods. Factoring is an immediate process that is less tiresome and less time-consuming.
On the other hand, the services of a debt collector are contracted by a company after several months usually three to nine months have passed before the debts have been paid. The contracting organization is not even guaranteed whether the debts will be paid due to the time that has passed. Besides, the process involved in collecting debts through a debt collector is tiresome and time-consuming as a legal process, and arbitration means have to be followed before deciding on forcefully taking the assets to recover the unpaid debts.
Using a factoring company to get your money in unpaid invoices is vital because it protects the company against bad debts and a problematic relationship between the company and your customers. Moreover, less fees are paid to a factoring company as compared to the debt collection agency that charges about 30% of the debts collected and sometimes you are not guaranteed whether the debts will be collected.
If you are looking for a factoring firm that will buy your invoices on the first day of rendering services or selling goods, seek the services of Capital Now, which is based at Calgary Alberta, in Canada. We can help your organization to compete effectively be ensuring that you have a continuous cash flow. Contact Capital Now today to get a clear understanding of our professional services which we provide to our valued clients.
Also published on Medium.