Offering customers credit or extended payment terms is a great way to increase sales without lowering prices. But what happens when your customers get behind and you’re left holding 30, 60, and 90-day past due invoices? You could find yourself getting orders that you can’t fill because you can’t make payroll, purchase inventory, and cover overhead and operating costs. You might also have more accounts receivables than you have cash in the bank. Factoring is a smart way to turn your receivables into cash.
What is Invoice Factoring?
Factoring is selling your accounts receivable at a discount. Generally, you’ll sell the receivable and the collection rights to a factoring company. You can factor both past due and current accounts. Here’s how it works: If you have a 60-day past due invoice for $1,000, you could factor it and receive $750.00. On the other hand, if the invoice is not due yet, you could factor the current account for $875.00. There may also be other fees for factoring services. The point is you get cash on hand that you couldn’t get before. It’s essential to understand that invoice factoring is not debt. You’re not borrowing money that has to be repaid. When you factor your accounts receivables, you’re converting an asset into cash. Getting cash without going into debt is the primary benefit of factoring. Not only will you be able to cover your operating costs, you’ll also have a resource that can help your business continually grow.
How to improve cash flow:
Time is money, and money is opportunity. Factoring is faster than applying for a business loan or line of credit. Some factoring companies can get cash into your bank account within 7 days. This means that you’ll be able to take advantage of discounts on inventory, and pricing specials on supplies and equipment when you factor your receivables.
Some factoring companies will purchase your current receivables on an ongoing basis giving you a stable renewable funding source. You won’t have to worry about meeting expenses like payroll because you’ll receive cash at regular intervals.
Whether you normally outsource your billing and collections activities or have paid staff to handle that function, you no longer need to incur the administrative costs of collecting your own accounts. You also avoid the interest expense associated with loans or credit lines.
Factoring Improves Cash Flow
“Invoice factoring helps you improve your business cash flow by speeding up your payment cycle, giving you a regular influx of cash, and eliminating collection costs and interest expenses,” said ROD Capital Management. If you are in a crunch, consider turning your invoices into cash through factoring.
