Quite often, one of our prospects or clients asks us, “if you are buying the receivables (or claims) why must I still do the collections and follow up with the payors?” This question is certainly worth answering and examining the process behind the answer.
First let’s understand that the factoring client has the better relationship, and certainly a longer relationship, with the payor. Although when a factor has to contact a debtor, it is done with sensitivity and tact. We as factors do not want to jeopardize the relationship with our client and his/her debtor during a collection call. Nevertheless, the factoring client should be contacting its customer for collection follow up. Bonds and relationships are in place that make such calls much more comfortable for the debtor, and it is within the normal course of business. Therefore, the main reason for the client to do this is for maintaining a “relationship.”
However, a less obvious but not less important reason, is the fact that collection efficiency keeps the factoring fees low. If the invoices (or claims) do not protract inordinately, fees remain reasonable and predictable. Also, any issues with an invoice can be recognized sooner, well before crisis mode has to go into affect. Therefore, it behooves the client to stay on top of the payment cycle for its own good.
From the prospective of the factoring client, it still needs the same billing and collections structure when signing up for a factoring line. There is no cost savings that is recognized when a factor is in place. The factoring client cannot discharge billers or collections personnel, thinking that the factor is now in charge of billing and collecting. It is important for the business development officer presenting the factoring option, to make it clear that the factoring client is not relieved of this responsibility.
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