Interstate Capital Corp: Two ways to get what you are owed - Factoring Companies vs. Collections Agencies

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Both factoring companies and collections agencies work to get their clients paid for their work, but the similarities end there. Factoring companies typically work with up-to-date invoices, communicate with clients’ customers with attention to their retention, and charge a nominal charge for their quick collections.

A good factoring company stays committed to its clients’ success and growth over the long haul because the factoring company will benefit right along with the client’s increased business.

Invoice factoring – getting paid upfront for completed work rather than waiting for customers to pay – provides a complete cash flow solution for hundreds of thousands of business owners around the world. It’s a financial service that starts working before a business even starts a job for a customer and keeps working until the customer’s payment is received in full. To be more specific, factoring begins with in-depth credit checks that protect clients from working for red-flagged customers with questionable payment histories. The factoring process ends with professional collections services to ensure that customers pay their bills when they said they would.

Some business owners only focus on the collections part of the picture and try to compare factoring companies with collections agencies. Both help businesses get paid for their work. However, any similarity stops there. The two business services offer quite a contrast, based on the nature of the debts, the relationships, and the costs – both in dollars and in time.

Type of debt:

  • Factoring works with current invoices.

These are what’s stacking up on the desks in the account receivables department. They are up-to-date invoices that come with a creditworthy customer’s payment terms, typically ranging from 30 to 60 days. A factoring company’s collections team stays in contact with their clients’ customers to both confirm their plan to pay on time and to resolve any obstacles (such as delayed paperwork) the customer might anticipate in meeting that commitment.

  • Collection agencies work with old debt.

These are payments that have not been received in 60 or 90 days or more. Typically, clients have been trying hard on their own for months to collect what is owed to them, with no success. Maybe the customer doesn’t have the funds to pay for the job in full; maybe the customer wants to raise some obstacle to payment, such as a cost or paperwork dispute; or maybe the customer hopes to get out of ever paying. In any case, the collections agency has been called in to settle this old debt.

Type of relationship:

  • Factoring companies’ relationships with debtors tend to be positive.

Factoring professionals are highly motivated toward customer retention for their clients and they treat these debtors as if they were their own valued customers. It’s common sense: A good factoring company stays committed to its clients’ success and growth over the long haul because the factoring company will benefit right along with the client’s increased business. Factoring companies want these debtors – the paying customers -- to continue hiring their clients for work. Consequently, their collections teams are courteous and responsive as they get the job done.

  • Collection agencies’ relationships with debtors tend to be negative.

A collection agency is hired when a business has failed on its own to collect. The business is ready to recoup or minimize its losses, even if it’s just pennies on the dollar, and the business has very little or no interest in working with this non-paying customer again. The collections agency will try everything to get a customer to pay, from frequent phone calls, emails and letters to legal action. You could say that some collectors have been known to be very emphatic in their communications as they persist in persuading a debtor to pay what is owed. There is rarely a long-term relationship or commitment to the client’s future business growth.

Type of fee and timing:

  • A factoring company typically charges a fee of 3%-8% of the invoice value.

This fee provides the client the use of their revenues upfront, without waiting 30 to 60 days or even longer. The factoring company advances the client the majority of the invoice value immediately after a job is completed, with the balance following after the customer pays. The factoring fee covers processing, credit checks, collections, and often many other services, including getting money to the client on the same day an invoice is submitted.

  • A collections agency typically charges a fee of 25%-50% of the invoice value.

For this debt collection service, a collections agency discounts what it pays the business by as much as half the invoice value – and sometimes the cost is even higher. While the collections agency offers a client only that one service, it makes sense that its fee will be higher because of the age of the debt and the risk that a customer won’t pay. A collections agency might work for months before a bill is settled, which means that the business owner will wait for months before seeing any funds.

The collections component represents just one part of the factoring process, but collection services, along with the critical credit-checking function early on, demonstrate how factoring works for businesses before, during, and after each of their jobs. The factoring fee covers both services: the credit checks to reduce clients’ business losses and the dedicated collections process that goes even further to reduce any risk of business loss. Factoring offers that full-circle support to businesses, whether they are small start-ups or large, long-established companies.

Factoring companies and collections agencies each have their place for a business owner, but they fill very different needs. To learn more about how factoring works and whether your business could benefit from accelerated cash flow and professional credit and collections services, consider Interstate Capital - - a leader in factoring since 1993. Interstate Capital is committed to educating business owners on their funding options.

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Cindy Graff Cohen
Interstate Capital
+1 800-422-5995 Ext: 153
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since: 03/2009
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