Cash flow is often a problem for businesses that use invoice billing models, but it does not have to be. For those in mercantile industries, the key to keeping customers happy is being able to offer invoice-plus billing, especially if you operate on the wholesale side. That complicates your finances, though, because it makes your income paydays inconsistent. You need to have a financial plan for stabilizing that income stream, and that’s where invoice factoring comes in.
What Does a Factor Do?
Factors offer you access to a portion of the invoice’s value by offering to buy it at a discount. How steep is that discount? It depends on your history with the factor and your customers’ payment histories. If you have clientele that mostly pays on time but providing them the window has complicated your cash flow then factors tend to be quite inexpensive. Especially when you consider that you also outsource your entire receivables process to them when you sell off your invoices. That’s a lot of labor saved, and sometimes even equipment and office supplies.
Factoring for Beginners
The first time you work with a factor, you will be seen as an unknown in just the same way you see the prospective financing company. That means you won’t necessarily get the optimum rates you would see after establishing a relationship that includes a regular schedule of invoice sales dates. If your customers pay regularly, though, it will still be a good quote. You’ll need to decide whether you are using a factor that demands all your invoices or one that allows you to selectively sell them. If you have a lot of invoices that are older but you feel the customer is a good risk, it might be more cost-effective to keep them and simply sell the fresh ones, for example.
Stabilizing Cash Flow with Factoring
If you set dates to send invoices over to the factor and establish a clear strategy for selecting the ones that go, you can set up regular pay dates that cover your basic cash flow needs while optimizing the cost of the factor’s services. This lets you collect full value from the invoices that are paid relatively promptly. And if you sell often enough, it still lets you sell all the unpaid ones before they get old enough to move out of that prime pricing group. As a result, you can make more regular inventory updates, invest in offering new products, and take advantage of other trade opportunities when they pop up.
Contact Array Financial to learn more about our business loans. Our large portfolio is sure to have something to offer your business, and we’re also able to tailor a commercial finance solution to meet your needs.
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