Collecting Accounts Receivable

Written by Patricia Tunstall
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Businesses extend credit to their customers typically for 30-60 days, but 90 days is not rare. Much depends on the type of business and the reliability of each customer. Corporations can afford to carry their customers for these periods because their sales and profits are large enough to absorb some losses.

Startup or smaller businesses are often unable to wait for these extended periods of time for the cash they are owed for their services or products. Theirs is almost a daily money-in, money-out enterprise in which the margin is too slim to permit invoices to replace cash. In addition, there is the problem of customers who pay after their due date, and customers who do not pay at all.

Factors Do the Collecting

It is not pleasant to phone, send repeat bills to, and eventually threaten customers with bill collectors. Most business people prefer not to engage in this collection process, and most are probably not very effective at it, as it does require training. Not only is it distasteful to many, but it consumes an enormous amount of time, which smaller business owners do not have.

If cash is tied up in invoices, and collecting on them is unpleasant and time-consuming, let factors do it. Not only do these financial institutions provide instant cash for accounts receivable, most of them assume the risk and take on the responsibility of collecting accounts receivable. This separation of business dealings from collections undoubtedly increases conversions of invoices to cash because the factors have the time and the prestige to do it effectively.


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