Getting Money from Unpaid Invoices: Factoring vs. Collection Agencies
As a business owner, you probably spend a large portion of your time looking at ways to improve your profitability. A new computer or a company vehicle might help you stay ahead of your competition. When things run smoothly, you do the work to provide a valuable product or service and you collect the payment you’re owed. When it comes time for your customer or client to pay you, most people settle their debt. Sometimes, you’ll experience non-payment or slow payment on your invoices. This can keep you from being able to afford payroll or other overhead costs. In order to keep your company running at full speed, there may be times when you need the help of an outside agency to collect your accounts receivables.
Why Use Factoring
A factoring company can provide almost immediate help if you have uncollected invoices that are less than 30 days old. The service checks your accounts receivables for age and creditworthiness, and if they determine that they have a good chance of collecting payment, they will pay you for the invoices. This process can provide payment to you within 24 hours.
Depending on the company you choose, the fees for this service could range from 3 to 7 percent of your total collectables. It’s a fast and fairly inexpensive way to initiate cash flow for paying bills or buying equipment that will help grow your business. Be sure to read the paperwork thoroughly to make sure you understand the entire process. If the company cannot collect the debt owed on a certain invoice, you may have to buy it back from them. Factoring is best utilized when your clients have good credit but are sometimes slow to pay.
While collection agencies also provide a way for you to collect on unpaid invoices, the process involved is very different from using a factoring service. The older an invoice is, the harder it is to collect the debt owed. Collection agencies will take on your aged accounts and pay you after the debt is paid to them.
This process can be expensive because fees of 25 to 30 percent will be extracted from any collected payments on your old receivables before the collection agency pays you. If you need money quickly, this process might not provide the solution to your financial woes.
Factoring might not be for everyone, but it can help your company if you experience seasonal lulls or if you want to expand in order to gain more business.