Factoring companies and collection agencies help businesses get paid on their unpaid invoices for services rendered. As much as they seem similar, they differ in their processes to a great extent. It is important for a business owner to understand the difference between factoring and collections to minimize the risks of non-payments in the future too.
What is the definition of factoring and collections?
Under factoring, a business sells its credit worthy unpaid invoices to a factoring agency at a discounted rate. The agency, in turn, provides the cash equivalent of a fraction of the invoice.
Debt collection, on the other hand, is the process when a collection company takes over a business’ debt. It then works towards retrieving the unpaid money through a series of phone calls, letters, and legal proceedings.
What is the difference between factoring and collection for unpaid invoices?
The main differences between factoring and collection are in terms of:
Purpose
With factoring, businesses can improve their inflow of cash as they receive working capital immediately instead of waiting for 30, 60 or 90 days. Factoring agencies usually have the capacity to provide a business with working capital in 24 hours or less.
On the other hand, a debt collection agency can only recover old debts, without the provision of working capital of any kind.
Process
During the factoring process, the agency first conducts its due diligence to make sure the invoice is credit-worthy. Once the details are verified and validated, the agency funds the business immediately.
The debt collection process, on the contrary, is a long and tedious process, which consists of several actions of written correspondence and reminders to retrieve the debts owed.
New vs old invoices
Typically, factoring agencies only accept invoices that are not more than a month old i.e., 30 days.
However, debt collection companies work with invoices that are much older, most times 90 days and more.
For more information on the difference between factoring and debt collection, contact Kore Capital, specialists of short-term working capital to small businesses, today!