Debt collection and invoice factoring are two distinct things that frequently get mistaken for one another. Although the two really have nothing to do with each other, misunderstandings frequently occur. Because of this, it is important that we review the roles of factoring companies and debt collection agencies, how they differ.
Role of a Factoring Company
The primary function of an accounts receivable financing company is to provide fast, same-week financing solutions to improve a business’s working capital or cash flow. It does this by expediting invoice payment from current clients.
Specifically, a factoring company runs a credit check on the business’s client to ensure it is creditworthy. Once this has been confirmed, the factoring company pays the business the amount of the invoice (minus a percentage) so that the business receives invoice payment right away.
The factor then collects the actual invoice payment from the client during the standard payment timeframe. As a courtesy to the business, oftentimes the accounts receivable financing company will “collect” and process the incoming invoice payment. For this reason, invoice factoring companies are sometimes confused with collection agencies.
Role of a Debt Collection Agency
Debt collection is a formal process or procedure that involves collecting on debts that are past due. Factoring companies, however, are collecting on current invoices while debt collectors are collecting on past due invoices.
True debt collection occurs in a situation where the debt is considered uncollectable. This means the client hasn’t paid their invoice despite numerous attempts on the part of the business to collect invoice payment. The debt will be written off as a business loss should debt collection efforts fail.
KW Receivables Can Collect for You
Though we “collect” invoices from clients on your behalf, we are not in the business of debt collection. We simply facilitate the collection of payment so that you receive invoice payment faster. If you need help collecting payments owed, contact us today to find out how we can help.