Whether you’re a small business just starting out or a corporation that’s been around for decades, chances are you could use faster cash flow at your company. Unfortunately, there’s no quick way to convince your customers to pay faster than their current credit terms require. A client who’s been granted 60-day terms isn’t going to start paying within two weeks simply because you ask them nicely. However, you do have another option–invoice factoring.
What is invoice factoring?
In simple terms, factoring is the process of selling part (or all) of your accounts receivable to a third party so you receive the money much more quickly than usual–often within days instead of months.
Of course, factoring does require a bit of a discount on your part for the third party, but the amount you pay is often well worth the quick funds. Also, you can often offset the discount fee in other ways.
What are the benefits of invoice factoring?
Obviously, the most important benefit is quick cash flow. But think about all the things you can do with instant cash:
1. Pay your employees.
If you’re struggling to make ends meet as you wait for customers to pay, instant cash will help you pay your employees without stress or worry.
2. Purchase inventory.
Inventory keeps your business running. Without it, you have little to offer your customers. This extra cash flow allows you to purchase what you need, when you need it.
3. Buy more efficient equipment.
If you’ve been needing new tools or equipment but haven’t had the funds, invoice factoring can help. This new equipment might be more efficient than what you currently have, saving you time and money on labor costs, too.
4. Renovate your office.
Is your office drab and dreary, or does it look anything but professional? Keep the clients coming back by sprucing up the place a bit. Nothing turns customers away faster than an unprofessional appearance, and that extends to your office, as well. You’ll be surprised what a fresh coat of paint and some new furniture can do.
How can you offset the discount fee?
With a little creative thinking, you’ll likely come up with many ways to offset the cost of invoice factoring since the benefits are so helpful to your company. Here are two easy options that are quick to implement and won’t cost you a dime.
1. Buy materials and supplies at a discount.
Many vendors offer a discount for large, bulk purchases and/or for timely payments. If you have cash upfront to pay for a large order, you will likely be able to negotiate a substantial discount which will offset the discount fee you pay to the invoice factoring party. For example, if you are charged a discount fee of 2.5% for invoice factoring, you may be able to make money if your vendor offers a discount of 3% for paying upfront for a large purchase.
2. Offer better credit terms to your customers and charge a fee that covers your discount fee.
If you utilize invoice factoring, you may be able to offset the costs by offering your customers extended payment terms. You can charge an extra amount for this favorable terms, which will then pay for your discount fee. For example, if your total discount fee is 2.5%, then you might markup your services by 5% and offer 90 terms. You’ve made 2.5% on these transactions, and your customers are happy than ever before.
If you’re struggling to grow your business because the cash flow just isn’t what it needs to be, don’t reach out for a high interest rate loan or keep floundering to make ends meet. Invoice factoring uses the money you create from your business to help your business reach the potential you know it has. Everyone needs help now and then when they’re running a successful company. Let invoice factoring give you the cash flow you need to grow.
Published on: May 15, 2015
Updated on: Jun 17, 2022