Factoring and debt collection are two completely different instruments. They share one things: the entrepreneurs use them when they need cash. Debt collection means recovery of receivables after the payment term. Factoring consists in financing of the non-payable receivables before their payment term.
We have been already explaining this issue in our Guide in the text: Factoring with a view to the client, debt collection with a view to safety.
Despite significant differences, these services are complementary and support the entrepreneurs on different stages of management of the transaction risk and company financial liquidity. Nevertheless, a part of clients interested in factoring is still afraid of the fact that in case of delays in payments, the financial institution may commence debt collection actions in relation to their customers.
In fact, the Factor monitors the timely receipt of payments and in case of delays reminds the customers of the factoring client about the need to make the payment. It is the so-called soft debt collection, which significantly improves the payment discipline of the factoring customers. The client may agree with the financing institution, in what time after the expiry of the payment term the first reminder is sent to their customers.
Debt collection, conducted by a professional company from the receivable trade industry, with observance of the top standards and ethics of debt collection in the B2B segment, does not adversely affect the relations between the business partners. So let us analyse the benefits coming from such cooperation:
First of all, thanks to effectiveness of the professional amicable debt collection, the factoring client does not have to be afraid that in case of delays in payments made by their customers, the Factor will suspend the financing. Another benefit is lack of recourse offered within factoring, i.e. lack of the need of the factoring client to pay the due amounts that should be paid by the customers of the client.
High standard of collection of the debt financed and insured within factoring is guaranteed at least by the fact that the enforcement of this debt is usually dealt with by a professional company specialised in the B2B debt collection, accredited by the insurer.
In case of small factoring companies, e.g. Pragma Faktoring, the so-called soft debt collection may be conducted by a debt collection company from the Capital Group, in this case – by Pragma Inkaso. We have already been writing about the advantages of cooperation with entities offering such complex service in the text: Look for the factor that collects debt.
Debt collection should be a natural consequence of delays in payments. The decision on its commencement should be made by every entrepreneur that has problems with recovery of the money due to it. The entrepreneurs should not be afraid of the fact that the Factor will be the initiator of debt enforcement, even more due to the fact that thanks to factoring, they may significantly extend the payment terms for their customers.
Published on: 9 November 2016