Factoring vs. Outsourcing

Managing a business is no small feat, and in a world that is increasingly interconnected it is a process that demands awareness of all the options out there—without exception.  Two key services that more and more businesses are drawing on these days are factoring and outsourcing, which are related though distinct services that deserve individualRead More

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Managing a business is no small feat, and in a world that is increasingly interconnected it is a process that demands awareness of all the options out there—without exception.  Two key services that more and more businesses are drawing on these days are factoring and outsourcing, which are related though distinct services that deserve individual treatment.  Below, then, we’d like to review each of these concepts separately and then reveal the critical, logical link between them to help business leaders comprehend how they could weave these services into their broader business plan.

Factoring: The service known as factoring constitutes a three-way financial transaction, where the three parties are the business (the seller), the client (the buyer), with the third party being the factor.  Factoring falls under the general umbrella of what is known as accounts receivable, or the management of invoices within an organization (the seller, that is).  Many businesses do not have regular invoicing periods, or at the very least are not able to rely on timely payment of their invoices—and that puts the business at financial risk, in extreme cases leading to full-out bankruptcy.

Entities offering factoring services offer a solution here by stepping in and buying the invoices from the seller, at some sort of a discount (which is how the factors make their profit).  The factor acquires the invoices and assumes total responsibility for securing payment on the—work that factoring entities specialize in—while the seller avoids cash flow shortages by having much-needed cash in hand at the time that it is most needed.  The slight loss of monetary value is seen as being worth it because the alternative, going for an unknown period without any immediate financing options, is completely unacceptable for 99.9% of businesses.

Outsourcing: This is a much broader concept, whereby services (and in other cases, products) are provided by an alternate source—generally, one that is not in-house (hence the “out” in outsourcing).  Factoring is, technically speaking, an example of outsourcing: rather than handling accounts receivable work in-house that demands skilled labor that is not involved in the business’s core tasks, these services are passed along to another entity that may be just down the road or, as the concept has increasingly come to be seen, across the world.  It makes a lot of sense that outsourcing is being implemented by more and more businesses globally, as it provides an excellent way to reduce overall staffing needs and, in the same stroke, reduce the operation’s total budget.

Outsourcing can be done in varying degrees.  Factoring, for example, usually is a form of partial outsourcing: a business only outsources the management of problematic customers’ invoices, while keeping in-house talent to do similar work that is less time- and budget-consuming.  A more complete form of outsourcing along these lines is known as credit control or credit management, entailing the complete elimination of such talent within a business’s internal structure.  Though outsourcing is usually implemented for non-core activities and services, this isn’t always the case.

The Cash Protection Agency specialise in debt collection in Leicester.

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