How many customers take longer than 30 days to pay on their invoices? Congratulations! Your business has just extended credit to your customers. You may not have thought about it this way, but you are now in the banking business. Even worse, you probably have the best rates in town.
If your customer went into the bank and asked to use money over time, the bank would set up a loan. The loan would certainly incur interest charges along with late fees for payments past due. Even the use of a credit card comes with financing charges when the balance isn’t paid in full each month.
So take a quick look at your accounts receivable aging report. How many of your customers are asking you to provide financing – at no cost?
What is this costing YOU in terms of restricted cash flow, borrowed funds, and missed opportunities? You are losing the use of that money while you wait for them to pay the invoice.
One solution is to implement procedures for collecting on accounts receivable along with penalties when invoices are paid late. This of course takes time and effort. Plus, it might leave you feeling like not only the bank but also the debt collection agency.
An increasing number of companies are financing their account receivables as another solution. Rather than a last resort, businesses see financing their account receivables as a way to:
– Receive immediate cash on invoices, often within 24-48 hours
– Reduce bad debt by screening customers upfront using the factor’s credit risk analysis
– Automate the back-office functions including statement mailing and collections
Often the services an account receivables factoring company provides as part of their standard operations will save a business as much or more than the fees themselves. More importantly, a business has immediate access to cash. After all, a sale actually counts when the money is collected.