Factoring Company vs Debt Collection Agency

Business woman leading her team at the officeOne of the most common misconceptions of factoring companies is that they serve the same function as a debt collector—this couldn’t be further from the truth. These two businesses serve two completely different purposes.

Understanding the Difference Between an Invoice Factoring Company & a Collection Agency

Understanding the difference between a factoring company and a debt collection agency will help you determine which is the best fit for your business. We have outlined the main differences between both companies to help you fully understanding.

1. New vs. Old Invoices

One of the easiest ways to determine the difference between a factoring company and a collection agency is by the age of the invoice.

Invoice Factoring Company

Factoring companies typically only accept invoices that are no more than 30 days old. The purpose of an invoice factoring company is to help businesses have access to the funds owed to their business faster than waiting for customers to pay.  

Collection Agency

A collection agency works with invoices that are past due, typically over 90 days. The purpose of a collection agency is to track down the customer and get them to pay their invoice with your company.

2. The Customer Behind the Invoice

Another factor that contributes to the differences between these two companies is the customer that holds the invoice.

Invoice Factoring Company

When a factoring company purchases an invoice from any business, they first run a credit check on the customer that holds the invoice. They only accept invoices from credit worthy customers, as the factoring company will hold the responsibility if the customer does not fulfill their invoice.

Collection Agency

A collection agency handles the complete opposite situation. A collection agency collects payment for invoices that are held by customers that have not made payment for an extended amount of time. They are hired by a business in order to get the cash that has is owed from customers that will most likely never pay.

3. Amount of Funds Advanced

Both invoice factoring companies and debt collection agencies give money back to the business, but the amount and the time frame differ.

Invoice Factoring Company

Factoring companies, like ours, advance up to 96% of your invoice amount in just 24 hours or less before any of the funds come to your business. This allows your business to get the money for its work without waiting for customers to pay their invoices.

Collection Agency

A collection agency runs a little different. With a collection agency, they do not advance money to your business. They are hired to get the attention of your clients and collect payment from your invoice. The collection agency will give you your funds after they receive payment from your customer.

4. Relationship with Customer

One thing that many people don’t consider about either of these types of businesses is their relationship with the customer. Both factoring companies and collection agencies hold a relationship with your customers, but they differ greatly.

Invoice Factoring Company

A factoring company holds a positive relationship with your clients. The factoring company purchases your invoices and handles the collection process to ensure that your business gets paid.  

Collection Agency

A collection agency works a little differently. Because the customers they are dealing with have defaulted on payments for extended periods of time, they use more heavy handed collection techniques. It is the collection agencies job to get your non-paying customers to pay. Their concern to uphold a positive relationship is not regarded in the same way as a factoring company.

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About the Author:

Robert Bernfeld started in the commercial finance industry in 1974. His early years included positions with Aetna Business Credit and Foothill Group. During the next thirty five years. Mr. Bernfeld established both equipment leasing and accounts receivable factoring companies. He partnered in founding Business Facilitators, Inc. in 1999. Mr Bernfeld graduated from the University of California, Riverside in 1974 and received his Juris Doctorate from Loyola University School of Law in 1977.

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