• Enquiry
• Quote
• Agree
• Work
• Invoice
• Paid

Third Parties

At some point the choice is to keep chasing or to involve somebody else. Three arrangements exist, they do different things, and they are frequently confused with each other.

For a software-side reference alongside this discussion of payment follow-up, disputes, and small-business administration, Monitask has this resource.

The three

Invoice finance. You are advanced a proportion of an invoice's value before the customer pays. Common facilities advance 80–90% within a day or two. (Vendor descriptions; terms vary substantially.) This is funding, not collection — the debt is still yours to worry about unless the facility says otherwise.

Factoring. A variant where the provider also takes over collection and, in some arrangements, the credit risk. Your customer pays them rather than you, and knows it.

Collection agencies. You keep the debt and somebody else pursues it, usually on a percentage of what they recover.

What each costs

Invoice finance: a charge against the advance, structured as a fee, a discount, or both, and varying with how long the invoice takes to pay.

Factoring: more, because more is being done, including the credit assessment of your customers.

Collection: a percentage of recoveries, commonly substantial, and frequently on a no-recovery-no-fee basis which is what makes it attractive on debts you had written off.

All three price the risk you are transferring, and the price rises with how bad the debt looks — which means the cheapest moment to use any of them is before the debt is difficult, and the moment people consider them is after.

What each does to the relationship

Invoice finance: nothing, where it is confidential. Some facilities are disclosed to the customer and some are not, and this is a question to ask rather than assume.

Factoring: the customer knows. They pay somebody else, and how they read that depends on your sector — routine in some, a signal of distress in others.

Collection: it ends the relationship. Handing a debt to an agency is a statement and it is received as one.

What to check before signing anything

What proportion is advanced and what is held back.

The total cost as an annualised figure, not as a headline percentage per invoice — the two differ substantially on short-dated debt.

Whether it is with recourse. This is the question that matters most: with recourse, an unpaid invoice comes back to you and you repay the advance. Without recourse, the provider carries it, and the price reflects that.

What happens to customers who dispute. Disputed invoices are commonly excluded from facilities, which means the invoices you most need help with are the ones not covered.

Minimums, terms and exit. Facilities frequently carry minimum fees, minimum periods and notice requirements, and a facility taken for one bad quarter can be a commitment for a year.

The cheaper alternatives, again

A deposit. Shorter terms. Prompt invoicing.

All three reduce the need for any of the above and all three are free, which is worth restating here because the moment somebody looks at invoice finance is usually the moment those three were not in place.

When a collection agency is the right answer

Where the debt is real, the customer is solvent, and you have run out of appetite.

The percentage is a poor deal against a debt you would have collected yourself and a good one against a debt you had stopped pursuing.

Which makes the question simple: is this an invoice you are actually going to chase again, honestly, this month. If not, a percentage of something beats all of nothing, and that is the whole calculation.

Selling the debt outright

A fourth possibility, and usually a poor one for small sums.

Debt sale means somebody buys the invoice at a discount and pursues it for themselves. The discount on small, unsecured, single-invoice debt is steep enough that it is rarely offered at all.

Where it is available it ends your involvement entirely, including any ability to settle on terms that preserve the relationship.

Which makes it appropriate for exactly one situation: a debt you have already written off, from a customer you will never work for again, where any recovery is better than none.

Doing it yourself first

Every one of these arrangements is being paid to do something you can do.

A letter before action costs your time. A telephone call to whoever authorises payments costs less.

The percentage a collection agency takes is the price of not making that call, and for many small debts the call would have worked.

Try it once, properly, before paying somebody else to try it — and where you have already tried and it failed, that is exactly when the percentage is worth paying.

What it does to your own position

Handing a debt over changes what you can do about it afterwards.

An agency working on your behalf is acting in your name, and how they conduct themselves reflects on you — particularly in a small trade where the customer talks to other customers.

Ask what their process is before instructing: how many contacts, in what tone, and whether they escalate without asking you.

And retain the decision on settlement. An agency authorised to accept whatever it can get will accept less than you would, because its incentive is recovery rather than the amount.

Telling the customer first

One final message before instructing anybody.

"I've had no response on invoice 214, now ninety days over. If I don't hear from you by Friday I'll be passing it to a collection agency."

A meaningful proportion of debts are paid at this message, because it is the first point at which the consequence is specific and imminent rather than implied.

And it costs nothing. Announcing each step in advance is the practice throughout this section, and this is the step where it pays best.

The short version

• Three different things: invoice finance is funding, factoring adds collection and sometimes credit risk, and an agency pursues a debt you keep
• All three price the risk you transfer, so the cheapest moment to use them is before the debt is difficult
• Invoice finance may be confidential; factoring is visible to the customer; collection ends the relationship
• Check the advance rate, the annualised cost, whether it is with recourse, how disputes are treated, and the minimums and exit terms
• Disputed invoices are commonly excluded, which means the ones you most need help with are not covered
• An agency is a poor deal on a debt you would have collected and a good one on a debt you had stopped pursuing

For broader background on payment follow-up, disputes, and small-business administration, see Entrepreneur.