Invoice-based companies often put a lot of work into their receivables, in addition to the cash they wind up having to take from reserves occasionally to manage bills and other obligations between customer payments. That is because giving customers the option to pay after the work is done leaves open a window of uncertainty about whether payment will be timely or even complete. Luckily, there are tools that can leave your cash reserves intact, and one of the oldest and most popular is factoring. It’s a little different from financing receivables because it takes them totally off your books, allowing you to close out the receivables entirely so you can move on with your business.
Costs of Using a Factor
Most factors provide this service by offering less than face value instead of asking for actual fees for factoring. The deal is basically an agreement to sell the debt for someone else to collect, but for accounts that have not gone past due. The good standing of the accounts allows you to get a lot more than you would on the debt market, too, usually somewhere above 60-70% of the invoice value. In many cases where customers have excellent payment schedules it’s even higher. You can also take some steps to get better terms, especially if you use this as a regular method of outsourcing your receivables.
What Determines a Factoring Offer?
Since this service is not a debt-based form of financing, your credit and financial health is often unimportant to the factor. Instead, what matters is your customers’ credit. They are the ones on the hook for a debt, after all. If your customer payment histories look great, you get more out of the deal. Similarly, if you sell young invoices, it is better for you financially. That is why many companies that use this service to outsource their receivables also finance every month or two like clockwork. No invoices can age past sixty days if you send them out that often, after all.
You can also usually count on a higher percentage of the face value if you finance every invoice that you hold instead of being selective. This does not hold true if you have customers with bad payment records, though. Companies using factoring as a regular method of cash flow financing need to keep that in mind and keep client lists trimmed accordingly if they want to enjoy a cost-effective service.