How to Make Factoring Work for Your Business￼
There are some industries where the expectation of invoice billing makes any other billing structure almost impossible to sell to customers. It’s just the case that for many companies, an irregular payment cycle caused by staggered customer payments is a fact of life. When that happens, many business owners turn to factors to schedule regular paydays and stabilize cash flow. That requires discipline, and sometimes it also requires a little adjustment to your quotes.
Send out Invoices Regularly
If you are using a factor to regularly get cash out of your invoices, the key is to do it often enough that none of them have a chance to age out of the prime pricing for that factor. Older invoices usually recoup less of their face value, so if none of them ever go past 30 days because you factor every month, you have no older ones to worry about. They also tend to get a better average percentage of their value when you send all of them at once because it creates a larger risk pool for the company providing you with factoring services.
Adjust Quotes to Offset Costs
It is relatively easy to adjust the quotes of customers whose invoices regularly go to a factor so you can offset the cost of the service. Customers who pay quickly enough after receiving an invoice to wind up sending you direct cash then have the advantage of a lower cost of doing business, which incentivizes bigger orders. Since the factor essentially outsources your receivables process and does the work of collection, this is an opportunity for you to lower your administrative labor too.
Cut off Customers Who Default on Payment
Most factors will not give you their best rates if they expect a portion of your invoices to be paid extremely late or not at all. While they do take on the risks that come with collection, factoring depends on your customers paying. As a result, if you allow them to default too many times you could face penalty fees in quotes or even a loss of service. The solution is to simply cut them off if they do not pay, so your factor only sees invoices from accounts in good standing.
Build a Relationship with a Single Provider
All of these tips only work out when you work with someone who knows your business. Those relationships take some time to mature, but you will notice your quotes becoming less expensive relatively quickly if your customers pay on time from your first round of invoices. That is the key to long-term success using this cash flow management strategy.
Here at Brightview Commercial Capital, we offer a variety of commercial finance solutions to all types of businesses—including startups and established businesses. We invite you to consult with us to see if any of our business loans can meet your company’s needs.