Dealing with debt collection:
A credit management function such as factoring or invoice discounting is a very useful tool here, especially if you are a new or growing business. This is a form of commercial finance where a business sells its accounts receivable (invoices) at a discount to a finance or "factor" company. This gains it immediate access to the cash owed to it by its customers. Normally debtors would take 30 -90 days terms, factoring eliminates this wait that normally follows a billing cycle.
Advantages of this function include:
• Application is simple
• Aids acceleration of cash flow
• Does not require personal guarantees
• Takes 3 -10 days to fund
• Your funding is not tied to sales
• You do not have to give up control or equity
• You are not continuously monitored
• Reduces your overhead.
There are a wide variety of companies which deal with factoring, from the multinationals such as, Lloyds TSB Commercial Finance, down to the small almost independent firms such as Ashley or Regency.
An example of factoring:
For example a recruitment agency "R" places an applicant "John" in a permanent position at company "X". On Johns first day R sends its bill to the factoring agency. The factor will send R the commission it is owed, less the discount, (approximately 2 - 10%). This amount will depend on the nature of the contract and the creditworthiness of the retailer. This immediate access to the cash flow allows R to pay its bills in a timely manor. The factoring company will then collect the outstanding invoice from X.
Factoring v Invoice Discounting:
There are two variations of Invoice Financing; preference for each will depend on how much involvement and control you would like to be included in.
1: Factoring: Your debtors are aware that the Factoring Company exists as it will normally deal with the credit control. i.e. = the factoring Company would collect the outstanding debts.
2: Invoice Discounting: This is identical to factoring except that the sales ledger management - the collection responsibility will remain with you. The service is undisclosed to the customer.
Managing external relationships:
The creditor's initial attempts to obtain payment from the debtor must be appropriate in all the circumstances. Too aggressive an approach in the early stages will lead the debtor to conclude that the creditor is unreasonable; too soft an approach will lead the debtor to conclude that the creditor is a soft touch.
By devising a sequence of standard letters and by determining a period of time over which those letters are to be sent, the creditor can ensure that appropriate contact occurs with the debtor. If the letters are being supported by telephone calls, then the creditor should plan each call and consider carefully the creditor's objective before each call is made.
Your initial attempts to obtain the money from your customer have to be suited to the circumstances. It is far too easy to aggressively storm in, in the early stages, implying unreasonable terms to the customer. On the other hand a soft approach may lead the customer to believe they can get away with not paying on time.
There are many routes that you can take to ensure a standard system of debt collection.
Letters can be supported by telephone calls, persistence and calm may pay off.
Alternatively you can transfer the hassle of this process to a debt collector. However this can too easily imply the end of the business relationship with your business and the customer.
Debt collectors are often known by their forceful and threatening tactics, scaring debtors into payment.
Again here you can see the potential benefits from invoice financing as the debtor need not ever know that the third party is involved, yet you will get your cash within days.