For any business, getting paid on time is one of the most important aspects of smooth running operations.
However, teams might not always have the staff or proper technology on hand to operate complex billing operations.
Rather than bog down staff’s time with tedious billing matters, companies may decide to outsource this workflow to a dedicated third party.
In this guide, we’ll cover 3rd-party billing in further detail, exploring why companies might take this route, the possible challenges of this arrangement, and what businesses might consider instead.
Definition of third-party billing
Third-party billing is the practice of using an independent third party to handle all billing and invoicing activities between a business and its customers and suppliers.
In this case, the business does not directly interact with customers or vendors on billing or payment matters. It’s the financial responsibility of the hired third party to complete all necessary workflows in the billing cycle, such as preparing and sending invoices, collecting payments, and following up on overdue balances.
Why businesses use third-party billing?
Of course, companies can manage billing and invoicing internally. As we’ll explore in further detail below, many choose to outsource these processes to an expert provider to reduce their administrative burden, save money, and ensure compliance and billing accuracy.
This practice is particularly common in certain industries where payments are more complex, like health services, insurance, utilities, and others.
Third-party billing services offer a flexible and convenient way for companies to send timely invoices and collect payments without direct, hands-on involvement in the process. This might be attractive to streamlined teams or startups that don’t have a ton of spare resources to dedicate to invoicing tasks.
How third-party billing works
Here’s an overview of how a third-party billing system works from start to finish:
- Sale of goods and services: The process is initiated when a company sells goods or services to a customer.
- Billing: The seller shares transaction details with the third-party provider so they can bill the customer on the seller’s behalf. This includes details like the customer’s name, the date of the purchase, purchase amount, payment terms, etc.
- Invoicing: The billing provider creates and sends an invoice to the customer based on the provided details.
- Payment processing: The customer receives the invoice and makes a payment using one of the accepted methods (credit card, ACH transfer, EFT transfer, check, etc.). The third-party provider oversees the process, following up if needed on late payments.
- Remittance: Once the provider has collected the funds from the customer, they will remit the payment to the seller, net any service fees they charge for their services.
The specifics of this process can vary between providers and individual circumstances. For instance, maybe the provider remits payment every time they collect from a customer. Or, they might send regular payments every week, month, etc., according to the terms of the service agreement.
Additionally, the third-party provider likely has some sort of reporting process in place so businesses can reconcile customer payments and invoicing data with internal records for accuracy and completeness.
Benefits of using third-party billing
As discussed above, companies use third-party billing for a variety of reasons. Here’s a closer look at some of the possible benefits of using this model:
Potential cost savings
A large advantage of using third-party billing services is that they can be a more cost-effective way to manage invoicing and payments.
If teams are faced with the option of hiring an in-house billing specialist with a full-time salary and benefits or using a third-party service for a per-transaction or monthly fee, the latter can be an attractive option from a cost perspective.
Enhanced efficiency
Especially as a company grows and expands its customer base, invoicing can become a highly tedious and resource-intensive process.
Using a third-party billing service means in-house teams have more time to focus on their core competencies, like serving customers or innovating their offerings.
Better billing accuracy
Third-party billing service providers are experts in all things invoicing, billing, and payments. Thus, hiring these teams can lead to a lower risk of billing errors.
This arrangement can increase customer satisfaction, as invoicing or billing mistakes can be frustrating and detract from their loyalty to the business. Plus, this means teams won’t spend their valuable resources working with customers to resolve billing issues.
Easier compliance
Using a third-party provider that specializes in billing and payment processing can also make it easier for companies to achieve regulatory compliance.
Dedicated billing companies deliver compliant payment services from day one, helping organizations avoid the serious risks that come from non-compliance, like a damaged reputation, legal penalties, and fines.
What are the challenges of third-party billing?
Using a third-party billing service can provide plenty of advantages. However, there are some challenges that companies should be aware of before taking this route:
Lengthy implementation
The process of hiring and implementing a third-party billing provider into a company’s existing workflows and systems requires significant time and effort.
Companies must ensure the provider they’re working with is well-versed in their systems and find workable solutions if needed to make the two companies compatible.
Lack of control
By nature of the model, businesses that use third-party billing give up direct control over the billing and invoicing process.
Ideally, companies hire a vetted provider that utilizes the best systems and top talent to ensure billing accuracy and timeliness. However, delegating the billing process to a third party means losing direct oversight over these workflows, which can be challenging or uncomfortable for certain teams.
Transaction fees
Using a third-party billing service can be a cost-effective solution for certain businesses. However, teams should fully understand any transaction fees or charges they’re responsible for.
If not, businesses may end up paying much more for the service than they had originally planned for, weighing on overall profitability.
Data security risks
Companies must safeguard customers’ sensitive information, especially payment details, to ensure compliance, retain trust, and avoid the significant financial cost of a data breach.
When delegating the payment process to a third party, companies must ensure the provider they choose to work with adheres to industry guidelines and compliance requirements. Otherwise, customers’ private data could be at risk, and the company’s reputation could suffer if the third-party provider experiences a hack or data breach.
Customer resistance
Customers may not always be willing to work with a third party on payment matters, which can add some friction to the implementation process and ongoing management.
Maybe they’d prefer to work with the business directly and see a third-party system as being too complicated or risky from a data privacy perspective.
Third-party billing vs in-house billing
Companies have a lot to consider when choosing between in-house or third-party billing.
On the one hand, in-house billing provides teams with direct oversight and control of the process. On the other hand, teams with limited resources and complex billing processes may not have the people power or expertise to handle billing accurately and efficiently.
Either way, this is often not a decision they’ll make overnight. Especially if a company decides to pursue the third-party billing route, they’ll need to take a strategic approach and thoroughly vet potential partners to ensure the service is smooth, secure, and reliable.
Moving from 3rd party billing to automation
Companies might consider using third-party billing services to streamline the invoicing process and reduce the administrative burden on their teams.
However, the potential drawbacks, like the loss of control over the process and customer hesitation, might make businesses have second thoughts about implementing this service.
An alternative that can provide them with the efficiency improvements and cost savings they’re looking for is an automated accounts receivable solution like BILL.
Businesses of all sizes can use BILL to retain control over the billing process while streamlining invoicing and payment workflows. With automated invoicing through BILL, companies can get paid two times faster and quickly sync payment data for easy and accurate reconciliation.
Sign up for BILL today to simplify your accounts receivable workflows.
