Back to Basics
The benefits of factoring are readily available to all who are interested. The process is easy to understand and many companies both large and small, as well as start-ups, are taking advantage of factoring their invoices, not just to survive, but also to grow.
Let’s take a moment to highlight the benefits of factoring and why it is such a valuable tool.
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Factoring takes your accounts receivable, and turns it into available cash
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Factoring reduces your potential liabilities and therefore increases the amount of equity held in your business
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Since factoring turns your non performing assets into cash it frees up your working capital to:
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Meet your expenses such as payroll, rent, loans
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Take advantage of supplier discounts by paying your suppliers early
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Generate cash when you need it to help your company grow
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But it is important to remember that you can only factor on invoices you have outstanding, and current business. How do you help yourself financially moving forward?
1. It is important to accurately forecast your cash flow. This involves projecting your cash flow in the future, and looking back at your cash flow history. Take a moment to think about what you can control, and what is potentially out of your control:
For example, what would happen in the following scenarios?
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If your most profitable customer decides to purchase elsewhere
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If you need to change your payment terms because your suppliers have changed theirs
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If you reduce lines of credit to your customers because suppliers reduce theirs to you
2. It is vital that you review your cash flow regularly to make sure you can cover your bills. No amount of factoring will work if you are not bringing in enough money to cover your expenses.
How well do you manage those customers that owe you money? Your customers are obviously the key to your success, but do you review their payment history, and whether they adhere to your agreement on terms of credit?
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Agree your credit terms up front
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Have a policy in place for late payment
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Generate regular reports on all your customers to determine their payment history
3. Historically, how do you finance your working capital?
There are several viable options for financing your working capital, such as credit cards or bank loans, as well as factoring. You may well adopt a combination of several options. Make sure to review these often to make sure they are working for you. Regularly take a look at your existing debt and determine that you are managing it correctly.
Lastly, invoice factoring can have added advantages:
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Create more business from existing clients by extending their payment terms
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Take on new contracts, such as government contracts, known to have long payment cycles, due to the ability to accept longer payment terms
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Use suppliers previously out of reach due to long payment cycles
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Hire more staff to manage the business knowing you can cover their salaries
For more information about how invoice factoring can benefit your company: