Invoice financing and debt collection are two disparate things that frequently get mistaken for one another. Though the two really have nothing to do with each other, misunderstandings abound. As such, it is a good idea to review the roles of financing companies and debt collection agencies, how they are different, and the common reasons for confusion.
What Is the Role of a Financing Company?
Companies that provide invoice financing (aka financing receivables) differ from debt collections agencies in numerous ways. First and foremost, 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 – this is done by advancing up to 90% cash against unpaid invoices from customers, with the balance received when the customer/debtor pays 30-60+ days later, less a very small fee that is charged by the invoice finance company. Think of it as giving a small early settlement discount for receiving upfront money instead of waiting 30-60+ days each time you issue an invoice to a client.
In order for financing company to get comfort that your clients will pay their invoices, it runs a credit check on the business’s clients to ensure it is creditworthy (the client is not aware of this nor does it affect their credit rating).
The invoice financing company usually sets up a bank account in the clients company name, but it is owned and controlled by the finance company. The reason it is done this way is because the finance company has already advanced up to 90% of the invoice value upfront, so it wouldn’t be fair for the debtor to pay the 100% into the client bank account (again). The invoice financing company will simply use the bank account to “collect” and process the incoming invoice payment, hold onto the 90% plus their fee and immediately transfer the balance into the client’s account the same day the funds are received from the debtor. For this reason, invoice financing companies are sometimes confused with collection agencies.
An Important Clarification on the Term “Collection”
Though financing companies “collect” invoices from clients on behalf of the business, they are not in the business of debt collection. It is true that an invoice itself signifies an amount a client owes a business and that an accounts receivable financing company facilitates the collection of that invoice. However, this is not the same as debt collection. All invoices that are funded by the invoice finance company are current and not overdue therefore there is no debt collection, we there is no funding provided to overdue invoices.
What Is the Role of a Debt Collection Agency?
Debt collection is a formal process or procedure that involves collecting on debts that are past due. So right here is a big difference between financing receivables and collections. Financing companies are collecting on current invoices, debt collectors are collecting on past due invoices.
Collecting on Invoice Payment Is NOT the Same as Debt Collection Proceedings
So if a customer/debtor owes money to a business but fails to pay what it owes within a certain time period (usually 90 days maximum), the two entities then enter a formal debt collection situation. Of course, this debt collection phase is only entered after all options to collect payment have been exhausted and the normal Statutory Demand notice has been issued. These standard options include the business calling or sending written correspondence to the client inquiring about money it is owed. These attempts to collect on unpaid invoices will occur several times over before a situation reaches the point where true debt collection is involved.
So What Is Debt Collection Then?
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.
Truth be told, formal debt collection procedures are not pretty. In such situations, the business that is owed money will hire a debt collection agency (this is often a law firm) to go out and aggressively collect the debt they are owed. Needless to say, the relationship between debt collectors and debtors is not entered into voluntarily.
Though the law limits the actions a debt collection firm can take, debt collectors are permitted to seize assets, equipment, machinery, vehicles, and more to repay a debt. They can even garnish wages in extreme situations.
Debt collection is a last resort option. Rather than write of the debt as a loss, the business hires a debt collector to aggressively go after the client to collect money owed to them. As you can see, this is nothing like what an invoice financing company does.
Accounts Receivable Financing Companies Process Receivables
By comparison, an accounts receivable financing company simply facilitates the collection of payment so that the business receives invoice payment faster than it would otherwise. It does this by serving as the middle man and shoring up this capital to the business as an advance and then collecting standard invoice payment later, whilst still ensuring that the client and its customer/debtor maintain good relations and the client continues to follow up invoice payments – the invoice financing company does not get involved in collections and chasing the debtor for payment, unless specifically asked to do so by the client. Debt collection is not warranted for remitting payment within the standard payment terms which is usually 30-65 days on average and as agreed to between both parties.
Financing Companies Handle Back-Office Accounts Receivables’ Tasks
The financing company does perform back-office accounts receivables duties. This involves managing the invoice payment process, noting when payment was received, and balancing the books accordingly. It processes the payments received, notifies the client when received and adjusts the funding availability for the client (ie: as and when debtors pay invoices so the client will be able to draw down on more funds as and when they issue new invoices to customers – exactly like a revolving line of credit). If receiving invoices makes a financing company the same as a collection agency, then essentially every business would be a collection agency.
As one can see, collecting invoice payments is not the same as debt collection; it is merely a passive accounts receivables’ function, without the collections. Invoice financing companies perform this receivables handling service to its customers as part of the larger accounts receivable financing process. Whilst leaving their client to still undertake the collections functions in reminding the customer/debtor when payment is due and/or calling upon when an invoice becomes overdue to gently chase the debtor and enquire as to why payment wasn’t made when expected. This is done as a courtesy, to speed along the invoice payment process, whilst still ensuring that the relationship between client and debtor remains between the two parties and the invoice financing company does not land up getting in between the two and ruining the relationship.
OptiPay is a trusted, leading invoice finance provider located in Sydney, Australia. Over the last five and half years, we’ve funded over half a billion dollars to over 350 Australian businesses just like yours. With a 4.9/5 Trustpilot rating, our happy customers trust us to provide smart, straightforward invoice finance solutions across many industries, including wholesale trade, labour hire, transport and business services.
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