A collection agency is a company that tries to recover overdue debts for a creditor. Agencies usually step in after the creditor's own billing and reminders have failed, and they are commonly paid a percentage of what they collect.
How it works in factoring
Factors and collection agencies both deal with receivables, but they play different roles:
| Factor | Collection agency | |
|---|---|---|
| When involved | When the invoice is current | After the debt is seriously overdue |
| Pays upfront | Yes, an advance | No |
| Main purpose | Financing | Recovery |
| Relationship tone | Ongoing account management | Escalation |
Full-service factors handle routine collections on purchased invoices, such as reminders and follow-up calls. When an invoice becomes seriously delinquent, the factor may:
- Charge it back to the seller under recourse terms
- Pass it to a commercial collection agency or attorney
- Absorb the loss under non-recourse terms if a covered credit event occurred
Commercial collection of business-to-business debts is generally treated differently from consumer debt collection, which is subject to the federal Fair Debt Collection Practices Act. State rules may still apply to commercial collectors.
What to check
- Who decides when a factored invoice goes to collections, and who pays the cost
- Whether you are consulted before a customer is escalated
- How recoveries are split if the invoice was charged back to you
Escalating an important customer to collections can end the relationship, so agree on the process with your factor in advance.