Waiting for a check from a customer with 30, 60, or 90 net day invoice models can be troublesome when your business has pressing and immediate cash flow needs. Although you may be able to convince a client to pay their invoice early, chances are all you’ll accomplish is creating a negative reputation in the marketplace for the way that you do business. Luckily there is a solution out there to get your business the cash it needs without waiting net anything. AR factoring allows you to sell your invoices to a third party at a discounted rate. The result is money in your pocket today to keep your business growing.
How it Works
Think of it as a collections agency before the bill is past due. You get a percentage of the invoice amount immediately, and forfeit the remainder as a profit to the third party. Many companies will completely take on the Accounts Receivable processing for your company. You submit the invoices to them, they pay you in 24 hours and collect the full amount due based on the net terms you established with the client. AR factoring takes the pressure of chasing money off of your plate and allows you to continue feeding money back into your business.
The main benefit of factoring is having cash in hand. A business with consistent cash flow and an established AR department would not need to turn to this option. However, if your business does not want to take on the overhead of managing collections or if cash flow is stagnant and you need immediate capital, AR factoring is an excellent solution. It’s fairly quick and easy to establish a relationship with a factor and to receive payment. Some businesses even set up this relationship early on and use it as a third party AR vendor ensuring quick and consistent cash flow when the company needs it most.
How to Leverage the Power of Factoring
Although setting up business with a factor is quick and easy, you’ll want to be thoughtful about how you proceed. If you don’t intend to use them for all invoices, all the time, you should consider carefully which accounts you do decide to factor. When you sell an invoice, the customer will be aware, since they’ll be told to pay the third party directly. This is fine if they are your full-time service, but if you don’t plan to use them this way, pay special attention to important clients. It may make more sense to continue working with them directly, rather than seeming rocky by occasionally selling their invoices. Understanding your business’s needs and using the cash flow opportunities of AR factoring will open up a world of possibilities for you and your company.