Invoice Factoring: A Better Way to Manage Your Accounts Receivable
A vexing problem almost every business faces, large or small, is accounts receivable. How can you get payments from your customers in a quick and timely manner? Is there a way to get them to pay faster? And if not, is there a way to get around the 30- or 60-day lag from when your invoice goes out and their payment comes in?
The answer is, yes! Through “invoice factoring,” you can sell your accounts receivable to a third party (known in the business world as a “factor”). The factoring company will pay you immediately and collect the money themselves down the road. This innovative financing concept provides businesses of all sizes needed flexibility in obtaining capital. Factoring costs are directly related to the business cycle.
Want to make the most of invoice factoring? Here are a few helpful tips to get you started:
- Understand what invoice factoring is, and what it isn’t – Factoring can certainly help your business improve its short-term cash flow and enable you to get almost immediate money from outstanding invoices. However, factoring cannot, and will not, solve ongoing issues such as customers with bad credit or clients who exceed their credit limit. Yes, a factoring company can aid with some of these, such as performing customer credit checks on your behalf, but ultimately, it’s up to you to determine who is creditworthy, how much credit you should extend and the terms and conditions of that credit. If you insist on extending credit beyond the amount a factoring company recommends, you are increasing your risk.
- Organization, organization, organization – Before you can even start to take advantage of invoice factoring, you have to know who owes you, how much they owe you, and when that bill is due. After all, if you don’t know the answers, how can you expect a third party to know? If you haven’t done so already, get your customer account files into shape before you engage a factoring company. Make sure all customer files have every piece of correspondence between you and the client, as well as all invoices and payments. Once you’ve done this, you’ll have a better understanding of the relationship’s history and, more importantly, you’ll have a clearer picture of outstanding invoices you can send to a third-party factoring company. Plus, you’ll have an organized accounts receivable system, which is always a good thing.
- Be open, accurate and include all liabilities – It’s natural as a business owner to be leery of disclosing delicate company information to strangers. However, to get the most bang for your factoring dollar, it’s best to be upfront about all liabilities, including the extent of your company’ indebtedness. By being open and honest, the factoring company can get a more accurate picture of your situation and can better devise a strategy for accounts receivable factoring.
With these tips in hand, what can invoice factoring do for you? By employing a third-party factoring company, you’ll be able to now:
- Improve cash flow
- Invest that money back into your business and into your staff
- Move resources away from collections into more useful and profitable positions, such as sales, marketing or customer service
- With more reliable cash flow on your end, you’ll be current with your suppliers and may even be able to negotiate better terms.
Now that you have a few ideas on how to make the most from invoice factoring, how do you choose a factoring company? Here are a few questions to ask when considering employing a factoring company:
- How long have you been in business?
- What are your fees?
- Must I submit all invoices, or do I have a choice in which ones I send to you?
- Are you industry specific? Do you have experience with companies like mine?
- May I see references?
Choosing an invoice factoring company is, like all business decisions, one that should be made only after careful consideration. It’s important that you find someone who understands your business and your unique situation. No two businesses are alike. Find a factoring company who not only understands you, but one that can offer you a range of solutions to your cash flow problems. The future of your business could be riding on your choice, so be sure, as with any transaction, you arm yourself with the best information you can find in order to make an informed decision.
Sr. Vice President of Operations at Charter Capital, a leading invoice factoring company for small to mid-sized businesses. Headquartered in Houston, Texas, Charter Capital provides accounts receivable financing and asset-based lending for major industries including freight and transportation, consulting firms, service providers, staffing firms, distributors and manufacturers, an oil and gas service companies.