Factoring Services: Not Just Cash
Being a small business what’s one of the things that keep you up at night.
If it’s not sales, building your customer base, having a good dependable staff, then it would have to be cash flow. Of course if it’s not cash flow directly, then you’re probably losing sleep over what checks you might see in the mail box the next day.
Proper cash flow management is vital if you want to run a successful business. Part of that is ensuring you have a quality customer base.
Utilizing factoring services can help ensure you have the quality customer base. This is because when you submit a customer to be factored……..a thorough credit evaluation of the customer is performed. The factor can sometimes inform you of the risks of doing business with this particular customer.
If I’ve kind of gone over your head a little bit on the whole thing about factoring, then let me back up a second.
Factoring is where you sell your accounts receivables relating to credit worthy customers to a third party known as a factoring company. There are many factoring companies out there so be sure to do your research.
Advance rates vary, but are typically around 80%. When the invoice is paid you get the remaining portion back less any applicable fees.
Factoring really helps in your company’s operating cycle in that it closes the gap between when an invoice is billed and payment is received. It helps get the cash you need to continue normal operations.
More than Cash Flow Assistance……………………….
Okay……so in case you haven’t figured it out yet……..factoring really helps your business with cash flow. It helps keep the employees happy, it helps with purchasing inventory, and really overall it just gives you a piece of mind.
More than that though……..it helps with your accounts receivable management, or at the very least the receivables you factor.
The factoring company has an interest too in receivables collections in that they want to see the invoices paid as well.
To help with this, I’d like to pass along a few tips to help in that process:
- Offer your customers quick pay discounts. Sometimes the smallest discount can be a huge incentive for your customer to pay you quicker.
- Review your accounts receivables daily. By simply monitoring your accounts receivables daily and contacting customers that have past due invoices, you can help turn your receivables faster. Keep in mind, there could be many reasons for customers not to pay. One in particular being, that the customer for whatever reason just does not have the invoice. Believe me this is a very common occurrence.
- Ensure prospective customers you are doing business with are credit worthy. You may want to consider signing up for a credit service. While the credit reports may cost a little bit, it is a small price to pay to make sure the customers you do business with are credit worthy and in turn may pay you faster. Also keep in mind, as I mentioned earlier when you factor receivables, the factoring company you work with will do a thorough credit review of your customers or prospective customers. They will be able to tell you the risks associated with doing business with a particular company.
- This is incredibly important. Keep a good rapport with your customer base. Believe it or not, I have seen where maintaining a good relationship with your customers can really help with keeping you at the top of their payment schedule.
Proper cash flow management is a very important part of running your business. Beyond that though, making sure you have a quality customer base is important as well. If you own a small business and you find that these two things you have a hard time with, then hopefully following some of the strategies mentioned above including investing in a factoring facility can help you get you back where you need to be.