Accounts Receivable Factoring – A Common Sense Approach
In a previous post, we briefly discussed why invoice factoring was a good small business funding solution along with which type of companies should utilize it and which ones simply should not. As such, this post is not a comparison of accounts receivable factoring to other forms of financing, but will focus on a simple little something we call “common sense factoring”. While the name says it all, this post is really nothing more than a common sense approach to knowing when, and when not, to sell your invoices. We hope you find it both useful and illustrative.
Since this is not a comparison of funding methods, we’ll begin by assuming that you’ve already come to the conclusion that factoring is the right solution for your company when it’s in need of working capital. One of the unique benefits of factoring is the fact that it allows businesses to receive immediate cash for the invoices of their CHOOSING. What this really means is that a company has complete control over when and how much they get funded. While this is a great benefit, companies often make the convenient, but unfortunate mistake of factoring more of their receivables than is needed or prudent. Just like anything else, businesses owe it to themselves to use factoring responsibly – that means calculating when and to what extent the benefits outweigh the cost. Below are 2 familiar situations we often see accompanied by a few tidbits of “common sense factoring” wisdom:
Using Accounts Receivable Factoring to Cover Current Expenses
- Don’t factor significantly more than is required to pay your bills, any excess comes at a cost with no benefit. Consider your total need as a % of average receivables – and if your need is less than 100%, you may be able to negotiate a lower factoring fee by reducing your advance rate to meet your actual need.
- Make sure you are not remitting payment for your bills early unless you are entitled to an early payment discount, if this discount is greater than your factoring fee then factoring could actually be making you money!
- Talk to those billing you, if they are willing to extend payment terms or if the late payment penalty is less than your factoring fee, it may help to reduce your total factoring need.
Growing Your Business with Accounts Receivable Factoring
- Don’t factor more than you need at any given point in time. Dormant capital comes at a cost and since factoring can get you the working capital you need when you need it, there’s no reason to stockpile factored capital.
- Take on new projects that actually add to your bottom line – only taking on new business that returns a net profit after considering your factoring fees means your company will be making more money, even if it results in a small profit margin reduction.
- Obtain deposits and prepayments from new clients when possible. Consider offering early payment discounts to your clients that are willing to routinely pay early – if the early payment discount is less than your factoring fee, you’ll be saving money by not factoring these invoices.
While the lists above are by no means comprehensive, they are items that should be regularly considered and evaluated by any company that is utilizing accounts receivable factoring. If you’d like to learn more about our factoring services and whether they are “right” for your business, feel free to Contact Us now.