There is a misconception that accounts receivable financing and collections are one and the same. The truth is that AR financing and debt collections couldn’t be more different. The two serve very necessary purposes in the business landscape. At FSW Funding, we have put together a short list of the differences between collections and AR financing to help clear up any confusion.
The Purpose of AR Financing
AR financing – or invoice factoring – is designed to provide fast access to revenue on unpaid receivables. Funds are frequently available within a single business day of invoices being submitted. This prevents businesses from waiting on staggered payment schedules to get access to revenue. Factoring also allows businesses to build up cash reserves without having to rely on loans for working capital.
The Purpose of Collections
Collections are performed on accounts which have aged well past the due date on their invoices. Within the aging period of an invoice, the transaction is still considered open. Once that payment schedule has expired, the balance becomes debt and collections are performed. Unlike factoring, which is used to speed up the rate at which businesses can access revenue, collections can actually add weeks onto the process from the time they commence.
AR financing processes receivables which are not overdue. For instance, a customer makes a purchase and an invoice is generated. If the invoice has a staggered payment schedule of a month or longer, the business can choose to either wait the full period to receive payment or use factoring. AR financing converts the open invoice to cash within 24 hours, which gives businesses a means to boost cash flow and make plans for growth, instead of waiting on staggered payments.
In short, collections are used to recoup debt from unsettled accounts with overdue payments. AR financing processed receivables while they are still “live” to improve cash flow and give business owners faster access to revenue. Factoring services are a regular part of transactions, making the accounting process easier, and in an indirect way, reducing the need for collections.
FSW Funding is a national leader for AR financing and factoring services. Contact our offices today and find out how you can accelerate your cash flow with invoice factoring.