Factoring Companies vs Collection Agencies

Rick Hultz

Improving cash flow through the use of factoring receivables is a smart way to free up resources within a cash-strapped company. It's a simple and useful method for receiving advance funds from invoices. A collection agency is an appropriate method for collecting old invoices that are well past their due date. It's important that companies know when to use each service. Using the right service will ensure a business doesn't pay more than is necessary to collect on invoices.

Factoring Solves Cash Flow Issues

Virtually every business must contend with cash flow problems at one time or another. New businesses and start-ups are particularly vulnerable to cash flow problems, and getting instant access to funds that aren't due for another 30 or 60 days is the situation to use receivables financing. Factoring companies require your customers have good credit.

Invoice factoring isn't appropriate when you're just trying to collect a past due invoice. That's when a collection agency is the best partner for the job.

Factoring Involves Fresh Invoices

The primary reason a business decides to use business factoring is to get paid on invoices that are "fresh". Most factoring companies wire funds to a company's bank account the day after invoicing. Factoring is quick and is the best way to improve cash flow.

When a business must employ a collection agency, the results are virtually never as quick and easy. A collection agency may work for months to collect a debt, and there is even the prospect of legal action and a civil suit with some debts. It's often a slow process, and it must adhere to the Fair Debt Collection Practices Act (FDCPA).

Utilizing factoring finance means getting paid quickly for current invoices, and it's a major reason companies will employ factoring services. A collection agency won't send funds until the agency has successfully collected the overdue money. Old debts mean waiting a long time for payment.

Debt Collection Rates are Very High

Old debts are difficult to collect, and the fees are much higher than those charged in accounts receivable factoring. A factoring company will usually charge somewhere between 2% and 6% of the invoice. Customers invoiced by the factoring company must have good credit, so the risk to the factoring company is low. This low risk is why the fees charged by accounts receivable factoring companies are competitive.

The fees charged by a collection agency are often much higher because of the risk and time involved in collecting old debts. Collection fees may be as high as 30% or more in some cases. However, using a collection agency might be necessary when a company needs to collect on an old debt. Collecting some money on an old debt even with a high collection fee is often better than never collecting the money.

FactoringClub.com is the premier source of information for invoice factoring companies. With factoring companies in most major cities and states, FactoringClub helps you find the right factoring company. Search our listings or call our factoring experts at (866) 748-7111 for assistance.

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