How debt collection & factoring works
You’ve probably heard and seen in the media that fast-loan companies sell their invoices to debt collection companies if they fail to get back the money they lent. This creates some confusion as invoices that go to debt collection are not sold but are only handed over to the debt collection company so that they can collect the debt to the lender. Sure, invoices are also sold, but then it’s about factoring, not debt collection. However, many debt collection companies also practice factoring, which is why it is often said that debt collection companies buy the invoices even though it is a factoring process.
A debt collection company is a company that seeks to recover a debt from a debtor (the borrower) so that the creditor (the lender) can get back his money. The debt collection company gets paid by the creditor to do the job and the debtor has to pay a collection fee of $ 180 plus interest on late payment.
So debt collection makes money
- The collection company charges a certain fee for the case itself.
- Many debt collection companies also have a certain annual fee.
- It is also quite common for the debt collection company to keep the interest rate and statutory fees, which also makes debt collection extra good on debtors who pay their debts late.
- There are debt collection companies that do not pay anything by the creditor if they fail to recover the debt.
This is how debt collection works
- When a debt collection case is received, they send a bill / claim letter to the debtor.
- If they have not been paid after one or more reminders, they often try to contact the debtor by telephone and by letter.
- If the debtor has difficulty paying his debt, the debt collection company can often provide a repayment plan that the debtor can manage.
- Once the money has been recovered, the creditor receives his money plus any interest for the time before the case ended up with debt collection and the debt collection company may retain the interest rate as well as the statutory fees that the debtor must pay. This is how it often looks. If they fail to repay the debt, it will usually end up with the chancellor.
A factoring company is simply a company that purchases invoices from companies, but it does not necessarily have to be about unpaid invoices.
Factoring for non-past due invoices
There are companies that make frequent use of factoring companies and who always let the factoring company take care of the invoicing. Instead of sending the invoice directly to the customer, they send it to a factoring company and this company ensures that the customer receives the invoice from them instead. The customer should therefore pay the factoring company instead of the company for which they owe money.
When a factoring company receives an invoice from a company, they pay a certain percentage of it, maybe 80 – 90% depending on the customer’s credit rating. The company thus loses money on sending an invoice via the factoring company, so why do they do so? Here’s the answer:
- When the invoice is sold, the credit risk disappears. Even if the customer does not pay the invoice, the company loses nothing because it is sold, only the factoring company loses it.
- The company gets their money right away, it doesn’t have to wait for ex 30 days until they possibly get paid.
Factoring for overdue invoices – eg for unpaid sms loans
Many lenders who have niche in sms loans prefer to use a factoring company instead of debt collection. This means that they sell the invoice to the factoring company that pays a certain percentage of the value of the invoice, but the percentage is, of course, much lower than in the case of a non-due invoice. The sms lender, in this case, does not then lose so much that the borrower has not repaid their sms loan, because it is better that they get some money than they may not for any money at all. They can certainly ask a debt collection company to repay the debt to them instead, but it can be costly, especially if the debt collection company fails to recover the debt.