Debt Collections Vs. Debt Purchasing: What's The Difference?

18 June 2015
 Categories: Business, Articles

Offering credit lines to your customers is a great way to boost sales in your business, but this also presents a major risk that you will end up with uncollectible accounts. It's always good to verify a customer's creditworthiness before offering a credit line, but this still does not guarantee that every customer will pay every dollar owed. Because of this, you may end up with uncollectible accounts, and there are two good options you could use to try to turn these accounts into cash.

Debt Collection Company vs. Debt Purchasing Company

When you have accounts that you cannot collect, you could write them off your books and act like they never happened, or you could take action and try to collect the money owed. Two of the best options you have for turning uncollectible accounts into cash are debt collections and debt purchasing.

A debt collection company is a business you can hire to go after the customers that owe you money. When using this option, you still own the debt; however, you will pay a fee to the debt collector each time money is collected from one of the accounts you have turned over. With this option, you have the chance of collecting all the money owed, or you might not collect any money owed.

The second option involves finding a debt purchasing company. A debt purchasing company is a business that will actually buy these uncollectible debts. When you use this option, you will sell these debts to the purchasing company for a certain price. Once you do this, you can close the accounts on your books and deposit the cash you received from the sale. You should realize that once you sell the debts to a debt purchasing company, they no longer belong to you.

Differences in These Options

If you really want to collect at least some of the money owed to your company, you should choose one of these options. Before choosing one, you may want to compare the options so you understand the major differences, which include:

  • Time frame – How fast do you want the money? That is the most important question to ask when making this decision, because the answers are very different with these options. When you hire a debt collector, you have no idea when or if you will collect the money from these accounts. On the other hand, if you sell the debts to a debt purchasing company, you may be able to get your money within just a couple days.
  • Amount you want to collect – The second factor to consider is the amount of money you hope to collect from the accounts, and both methods will usually result in collecting some money. The difference is that with debt collection you have no idea how much you will get, because it will depend on how much the debt collector can collect. Debt purchasing companies usually pay a fraction of the face value of debt when they buy it, but you will know exactly how much you will get from the deal.
  • Paperwork – Finally, there is a difference in the paperwork and bookkeeping tasks related to each option. With debt collections, you will still keep the accounts on your books. If payment is eventually received on a debt, you will need to post a transaction to your records to reflect this. This can be an ongoing process until all debts are collected or written off. With debt purchasing, you can write every account off all at once and never have to deal with these accounts again.

Many companies prefer using a debt purchasing company for uncollectible accounts, but you can look into both options and choose the one that is best for you. To learn more about this, contact a company that offers debt purchasing services or visit a site like