Managing accounts receivable is an important part of running any business. After all, businesses need to get paid for their products and services to keep the books balanced. However, managing accounts receivable can be a complex and time-consuming task, especially for small- and medium-sized businesses. Chasing customers for payments takes both time and effort and can detract from other aspects of the business. That is the reason many businesses take advantage of invoice factoring.
The folk at Utah-based finance company Thales Financial explain that invoice factoring allows businesses to turn their outstanding invoices into cash. By factoring invoices, businesses don’t have to wait until their customers pay them to access cash. Here is a little more on how it all works.
What Does Factoring Your Invoices Mean?
Factoring invoices means selling outstanding invoices to a third-party factoring company and receiving a percentage of their worth. The factoring company then collects payment from the customer and pays the business the remaining balance (after deducting a fee for their services). How much the factoring company advances at the time of factoring the invoices and how much they charge for the service will depend on the agreement between business and factor.
Some factors might advance between 80% and 90% of the invoice amount while others will advance the full amount. Fees vary from one factoring company to another as well.
How Invoice Factoring Helps with Managing Accounts Receivable
There are several benefits to using invoice factoring as a way to manage accounts receivable. One of the most significant benefits is improved cash flow. By turning outstanding invoices into cash at the point they are raised means businesses can use the funds to meet their financial obligations.
Invoice factoring can also help businesses save time and resources. Instead of chasing down payments from customers, businesses can outsource this task to the factoring company. This allows the business owner and their employees to focus on other areas of the business, particularly sales and marketing.
How Much Will Invoice Factoring Cost Your Business?
As mentioned earlier, the fees associated with invoice factoring can vary depending on the factoring company. Typically, factoring fees will be between 1% and 5% of the invoice value. Some factoring companies may also charge additional fees, such as setup fees, processing fees, or termination fees.
It is important to understand the costs and fees associated with any invoice factoring contract before deciding. While the fees may seem high compared to other types of financing, it’s important to consider the benefits of improved cashflow and time savings.
How to Make Invoice Factoring Work for Your Business
If you are considering using invoice factoring to manage your accounts receivable, there are several tips you can follow to make it more beneficial. For starters, choose a factoring company that has experience and a good reputation. This ensures that the factoring company is able to collect payment from your customers in a timely and professional manner.
You should also make sure to negotiate the fees with the factoring company. While some factoring companies have set fees others are more flexible, so it is worth asking if there’s any room for negotiation. Additionally, some factoring companies offer volume discounts or other incentives for businesses that factor a set number of invoices each month.
Invoice factoring can be a valuable tool for managing accounts receivable and improving cash flow. However, before making a decision, it’s important to weigh the benefits and costs of invoice factoring for your own business. With the right research and careful consideration, you can choose a financing solution that meets your business’s needs and helps you achieve your goals.