One of the first things to come to a business owners mind when hearing the word Factoring is cost and way too much of it.  However, this isn’t necessarily the case.  As a matter of fact, depending on how one views the situation, it may actually not be a cost at all.  It is easy to always focus on cost and this is often the first question that is asked from a business owner to a Factor, “how much will this cost me?”  When in reality this should not be the first question to ask; but “how can it benefit my business?”

It is important to look at the benefits of Factoring and how it can improve cash flow.  Can the availability of cash actually allow for other cost savings?  The overall scenario needs to be analyzed and a full understanding of why Factoring should be used needs to be thought over.  There is not one single answer for all business owners as to why the cost of using a Factor is justified and actually beneficial.  Just as companies have their own unique products and services, they also each have their own specific needs for cash and reasons for managing it in a particular way.

Here are some thoughts to consider.  Think for a minute if you were told that the cost to Factor was 2% for 30 days.  Does that seem expensive?  Now think about the terms you offer a customer, probably net 30 days; however, you offer them a discount for early payment of 1% or 2% for 10 days.  That’s actually 3-6% for 30 days, far more than factoring.  And your cash flow is unpredictable as you don’t know when your customer will actually pay you (5 days, 10 days, 30 days).  If you are already willing to take a discount of 3-6% then why not take a discount of 2% and get your cash within 24-48 hours of sending an invoice?  Knowing when the cash will be in your account for your use is far more important than having an amount that is owed to you in the future.

Next let’s consider what benefit you receive for turning your receivables into cash quicker.  Your vendors most likely offer you a discount for early payment, just as you offered discounts to your customers.  Therefore, the same analogy applies, as above.  If you can take a discount of 3-6% per month (1-2% per 10 days) on purchases then your cost of 2% to Factor is more than offset.  As a matter of fact, you are actually ahead with a net positive return as opposed to cost.

So why is it that the cost of Factoring is viewed as expensive?  In my opinion, it is simply that the business owner does not fully evaluate all the benefits.  Not only is there the opportunity to take the discounts from vendors that are available but also the ability to purchase the additional inventory or materials required for new orders.  The benefits of improved and predictable cash flow should outweigh the cost if managed properly.

There are other benefits that offset the cost that are not as easily measured.  A business owner needs to focus on the quality of product or service they deliver to the marketplace.  Trying to evaluate credit worthiness of customers is another project.  Factors can assist in providing credit limits for customers so that the business owner can focus on their business and what they do best.  Why have an internal credit department and additional employees which increase costs to overhead when this service is included in a Factoring Fee?  Setting credit limits for customers does not generate revenues.  Business owners need to take advantage of all the services provided by the Factor to maximize the benefits from the cost.

Business owners should view a Factor as their outsourced Credit Department.  Take advantage of the services provided and receive full value for the cost.  Improve quality of customers and the amount of credit extended, take advantage of discounts available from suppliers/vendors and manage the process of turning invoices into cash as opposed to being your customers Bank.  Increased sales should result in increased cash and not just an increased portfolio of accounts receivable.