While it’s true that there are costs associated with factoring your invoices, the fact is that they are often much lower than other forms of financing and can actually save your business money in ways that you might not even consider.
No matter what your reasons for wanting to work with factoring companies, it can prove to be a smart financial move for your business.
1. Lower Fees
Typically, factoring companies only charge around 3 to 6 percent of the total amount on factored invoices. Even when you consider the account setup charges (which depending on the company you choose can be anywhere from nothing to a few hundred and on up to a few thousand dollars), the costs of factoring are generally much lower than what you would spend in interest if you went to the bank for a traditional loan, or use credit cards to cover business expenses while awaiting clients to pay their invoices. Because you can choose which invoices to factor, you have more control over the costs, as opposed to a bank loan which accrues interest for the life of the loan.
Factoring can also save you fees in other areas. If your business is in a cash crunch, and you need to pay your vendors, getting paid more quickly via factoring will allow you to keep your accounts current, and prevent costly late payment or collection fees.
2. Potential Discounts
Speaking of paying your vendors, when you are able to pay quickly, you may qualify for prompt payment discounts from your vendors. Some companies offer a discount as much as 5 percent of more to customers who pay in full and before the due date, and factoring can provide the cash to help you qualify for those perks. If nothing else, you can avoid racking up interest charges on your outstanding bills by making larger payments and paying on time.
3. Reduced Collection Costs
How much time and money are you spending on collections every month? Not only do collections affect the bottom line simply by virtue of being on the books, but if you or your staff spends time making phone calls, sending letters, and following up with late-paying customers, that’s time that could be spent on other business-building tasks. And if the customer still doesn’t pay? You could be out hundreds or even thousands of dollars in collection costs, and even be forced to take a reduced settlement in the end. By working with a factoring company, you save all of that money — not to mention time and aggravation.
4. More Opportunities for Your Business
When you begin to evaluate your receivables management, it’s important to consider the cost of lost opportunities due to cash flow problems. In other words, is your business missing out on opportunities to grow because you lack the cash? Are you stuck in a space that doesn’t fit your needs because you can’t afford to remodel or move to a larger location? Would you like to add new products to your inventory, but you can’t afford to buy stock? Is your equipment old or outdated, causing slowdowns in your work? Any of these issues can negatively affect your business and prevent you from meeting your goals.
By factoring your invoices and getting cash sooner, though, you do not have to worry about missed opportunities and their costs. You will be better positioned to take advantage of them when they present themselves, without as much concern about where you will get the money you need. And as opposed to a bank loan, which usually comes with restrictions about how you use the funds, when you factor invoices you can spend (or save) your money however you wish.
Invoice factoring isn’t necessarily right for every business. There may be situations in which other forms of financing are more appropriate. Still, if you are looking for places to trim expenses while increasing your liquid income and staying ahead of your obligations, it’s well worth your time to investigate whether invoice factoring is right for your business.