Is third-party billing right for my startup?

Startups invariably ask themselves the question: what work should be kept in-house, and what work should be outsourced? You can trade control over the work for freed-up time — a decision that may not have an obvious answer.

For many startups, sending invoices and collecting payments from customers is a time-consuming process. On top of that, you may not have the internal expertise for some of the more complex issues related to billing.

A third-party billing provider can relieve some of the burden, but does it make sense for your business? Here are a few things to keep in mind.

What is third-party billing?

With third-party billing, you outsource all billing-related activities to another company. A third-party billing provider takes on the responsibility of sending invoices and collecting payments.

If you’ve stretched your internal resources, third-party billing companies are well-equipped to handle any increase in volume. They can also handle complex scenarios, like multi-currency billing or billing that requires industry-specific expertise.

How does third-party billing work?

Third-party billing has more steps than invoicing a customer directly. There is some back and forth that occurs between you and your billing provider.

Here’s a quick overview of a typical process.

1. Transaction: You deliver goods or services to your customer.
2. Billing information transfer: You need to send the billing details to your third-party billing provider (such as customer information, products/services delivered, and the cost).
3. Invoice generation: The third-party billing provider generates an invoice and sends it directly to your customer.
4. Payment collection and processing: Your customer pays the third-party billing provider. The provider handles any payment processing, such as credit card processing or bank transfer.
5. Funds transfer: The provider transfers the funds to your company, less any fees charged for its services.

The third-party billing provider will also follow up on any past due invoices. If needed, the provider will also pursue collection efforts, such as sending a demand letter.

Benefits of third-party billing

Third-party billing can be convenient for startups. Billing can be time-consuming and tedious — distracting from work on your core functions.

In addition to freeing up your time, working with a third-party billing provider has several other key benefits.

Efficiency and accuracy

Third-party billing providers tend to have experienced staff who are accustomed to handling these issues every day. With accurate billing, you’ll have fewer customer inquiries, fewer errors, and faster payment cycles.

These providers also have streamlined processes for any follow-ups. They’re dedicated to payment collection, whereas, internally, you may have someone juggling collections amid other responsibilities.

Compliance with regulations

Payments are highly regulated, with laws governing everything from consumer protection to state-specific collection laws. Third-party providers stay up-to-date with ever-changing regulations. They’ll ensure that your business remains compliant with any applicable laws.

Cost reduction

If you use a third-party billing provider, that reduces the need to hire someone internally. The money you would spend on staff (or fractional help) can be redirected to other parts of your business. You also won’t need to pay for software to handle billing and invoicing.

Even if someone is handling billing alongside other responsibilities, you can redirect that person to other tasks if you outsource billing and payments.

Scalability

Even if you start with an internal hire, your startup may not be able to stay on top of billing tasks as your company grows. More invoices may inevitably lead to more customer inquiries, late payments, and collections efforts. The automation that invoicing software offers can help, you may find that you still need to grow an internal billing department.  By contrast, a third-party billing provider can manage any increase in volume.

Challenges of third-party billing

While third-party billing relieves you of the administrative tasks related to invoicing and payments, it creates some new challenges. Some you’ll have to work through, and others are an ongoing aspect of working with an outsourced provider.

Less control over your finances

Third-party billing can improve your cash flow with persistent follow-ups and collection efforts. However, you’ll have little control over the process. If you were handling billing internally, you might place a call or send an email to a customer with a past due invoice, and the customer responds to the direct outreach. With third-party billing, you’ll be hands-off from the process.

You may also experience delays between your customers’ remittance of payments and when those payments hit your bank account. Some third-party billing providers may send payments as soon as they’re received, but others may send lump payments on either a weekly or a less frequent basis. If you’re cash-strapped, this might impact your business operations.

Communication gaps

You’ll need to create a clear process to communicate billing details to your third-party billing provider to ensure that your customers are billed accurately. This is something you can improve the longer you work with the provider and the more the provider becomes familiar with your goods or services.

Customers will usually communicate directly with the third-party billing provider if they have questions about the invoice. You should ensure that the provider has excellent customer service, or you risk customer dissatisfaction, which can hurt your business.

Fees

While third-party billing reduces your internal headcount costs, you’ll pay fees for each invoice. This can range from a flat fee per invoice, to a percentage of the invoice, to a fixed monthly charge for the services. If costs are a concern, you’ll want to compare the costs of using a third-party billing company versus an internal hire.

Ability to integrate

If you rely on internal tools — like a CRM, for example — it might be tricky to integrate the third-party billing provider’s software. Without integration, you may have some gaps in a complete picture of your customer’s relationship with your company or other insights you rely on.

If you handle billing internally, you’ll be able to connect the billing software you use with other tools within your organization (depending on the integrations available).

For example, you can send invoices from your Mercury account. With invoicing and banking

¹ in a single app, invoicing and payments are matched automatically, saving you time. You’ll also have visibility into your outstanding invoices and when they’re due.

When to consider third-party billing for your startup

One of the most valuable assets your startup has is your resources. How you choose to allocate those resources can have a significant impact on your growth.

So, what’s the best use of your time and money? Will more control over billing lead to better cash flow? Can you save money if you handle billing in-house? Or will you benefit from the dedicated resources of third-party billing?

For most startups, third-party makes sense when you reach a complexity or volume you can’t handle internally. Otherwise, unless the idea of internal billing is deeply intimidating or the math doesn’t make sense, you’re better off hiring someone. Even a part-time or fractional role will give you more control over your cash and your finances.