Factoring accounts receivables has become a valuable option for businesses that simply cannot wait to be paid by slow paying customers, but is it really worth the cost?
Let’s take a quick look at cost. When you decide to factor, your factoring company will set a rate, which is dependent upon several things, some of which are:
- Sales volume
- Invoice size
- The creditworthiness of your customers
- The number of creditworthy customers
- The length of your contract with each customer
- The number of days the invoice is outstanding
It is also worth considering the level of service you will receive from your factoring company before you write off the opportunity to factor because you think it may be costing too much.
The best way to tackle this is to weigh up the pros and cons.
The most drastic approach would be that you are in a cash flow bind, and you simply cannot wait to be paid by your customer. Due to your financial situation, you may have to pay a higher rate than you would ideally like in order to factor your invoices, but doing so will allow you to not only stay in business, but continue to accept orders from your slow paying customers. Is accounts receivable financing worth the cost for you? If it allows you to continue to meet your financial obligations, and keep your business afloat the answer would most likely be yes.
Many small businesses use factoring to get going. Factoring is a great answer for a start up with creditworthy customers who are sure to pay their invoices. There may be little credit history for the start up, but since factoring focuses on your customer’s credit history, a small start up business with little other capital will more than likely qualify to factor where a bank may take a less positive approach. If the cost of factoring is higher than a loan from the bank, but the bank loan is not forthcoming, then factoring is a perfect way to begin, with the opportunity to move over to a bank loan, or combine traditional loans with factoring once the business is more established.
The invoice factoring company will handle credit checks and invoice management, which can also be a money saver, as you do not have to worry about handling this in-house. In many cases they will also set a maximum credit line based on your customer’s credit check. This can ultimately save you from extending too much credit to a customer who ends up not paying invoices.
Many large companies without cash flow issues also choose to factor their invoices for many of the reasons stated above. Invoice factoring is no longer a last resort answer to better cash flow; it has become the solution for many well-established businesses.