Businesses with significant outstanding debtors sometimes evaluate two competing approaches to improving cash flow: invoice factoring (or debtor finance), which provides immediate cash against the value of the ledger, and external debt recovery, which focuses on collecting what is already owed. These are different tools solving different problems, but for a business with a mixed ledger — some current accounts, some overdue — understanding the cost and outcome of each is worthwhile.
The scenario: $200,000 debtors ledger
Assume a business has $200,000 outstanding across its debtors ledger, structured as follows:
- $80,000 current (within payment terms)
- $70,000 overdue by 30–60 days
- $30,000 overdue by 60–90 days
- $20,000 overdue by 90+ days
Invoice factoring: cost and outcome
Invoice factoring provides advance payment against eligible invoices. A factor typically advances 70–85% of the eligible invoice face value. Not all invoices are eligible — very old invoices, disputed accounts, and invoices from certain debtor types are often excluded.
For the $200,000 ledger above, assume the factor accepts $150,000 as eligible (excluding 90+ day and some 60–90 day accounts) and advances 80%, or $120,000. The factor's fee is typically 1.5–3% of invoice face value per month until collected. At 2% per month over a 45-day average collection period: $150,000 × 2% × 1.5 months = $4,500 in fees. Net cash received on this scenario: approximately $115,500 in effective cash after fees on $150,000 of eligible invoices.
The $50,000 of ineligible accounts remains uncollected and presents continuing recovery challenges.
Debt recovery: cost and outcome
External debt recovery focused on the overdue portion ($70K + $30K + $20K = $120,000). A contingency recovery agency charges 15–25% of amounts recovered.
At an average recovery rate of 80% on the 30–60 day bucket, 65% on 60–90 day, and 40% on 90+ day: estimated recovery = ($70K × 80%) + ($30K × 65%) + ($20K × 40%) = $56,000 + $19,500 + $8,000 = $83,500. At a 20% contingency fee: net to creditor = $66,800, plus the $80,000 current accounts paid in the ordinary course = $146,800 total cash received.
What the numbers show
Factoring provides faster cash on a portion of the ledger but leaves the problem accounts unresolved and charges a fee against all eligible invoices including those that would have paid anyway. Debt recovery costs are incurred only on amounts actually recovered, and focuses effort on the problem accounts. The right choice depends on how urgently the business needs cash, how disciplined its existing customers are, and whether the older accounts are genuinely recoverable.
Many businesses use both: factoring for the current ledger to improve working capital velocity, and a recovery agency for the overdue tail. Contact Merion to discuss the right approach for your specific ledger composition.