There are times when a collection manager will despair of ever receiving a large payment from a cash-strapped customer. The customer does not have the cash flow to pay the receivable in anything remotely resembling a reasonable period of time. If so, inquire if the customer is already factoring its accounts receivable in order to accelerate its cash flow. If that is the case, the customer is probably paying significant fees to a third-party financing organization. Though this may appear risky, the collection manager can consider volunteering to take over the factoring relationship in order to pay down the receivable owed to his company.
The arrangement would be for the company to factor its customer's receivables, and to split the customer's factoring cost, with a portion of the cost paying for the overdue receivable due to the company, and the remainder covering the company's actual financing cost. By doing so, it may be possible to eventually salvage a large receivable that would otherwise become a bad debt.
However, there are numerous problems to clear away before this becomes a viable, low-risk approach. First, the company must establish a full-service factoring arrangement, so that all payments from the customer's customers come directly to the company. Also, the company must have full recourse against its customer, in case the receivables it is factoring are not paid. Further, it should only accept receivables from the highest-quality customers, and should consider requiring credit insurance for those accounts. Only by using most or all of these techniques will the collection manager have a reasonable chance of eventually earning enough from the factoring relationship to pay off the overdue receivable.
Obviously, a company must also have sufficient cash reserves to allocate to this technique, and be willing to invest in it for the several years that may be required to pay off the overdue receivable. Also, any in-house investment policies may not allow the collection manager to allocate funds to a factoring arrangement. However, if these hurdles can be overcome, the collection manager may end up with a long-term relationship with a customer who will likely be extremely grateful for the financial support.