Invoice-based accounting is expected in many industries, including many where small businesses dominate. It’s also one of the most labor-intensive ways to handle your billing because of the cash flow issues that can pop up if customers pay late. For large companies, this is not a big issue because a robust accounting department is there to handle the work. For smaller ones, the extra work and the cost of late payments when cash flow gets crunched are both put on the owner, who is frequently doing the books alone or with the help of just a couple of people.
Invoice factoring is popular with businesses that need to streamline the cash flow management process and minimize the labor involved with tracking and collecting invoices because it is designed to do both of those things. Instead of financing business assets or tapping into credit, factor agreements are basically sales of your invoices to a third party for collection. You do get less than their face value, but you also get the money exactly when you need it.
What Kinds of Businesses Benefit?
Many types of businesses benefit from the ability of factors to deliver regular pay dates that help manage cash flow, but not all of them do it to access the labor savings that comes when someone else collects the invoices. Companies that are specifically looking to get invoices off their books and minimize collections tend to be those with small staffs, including owner-operated businesses like single-person electrical repair or plumbing professionals.
Basically, if your company does not already have someone who takes that work off your shoulders, then you can probably benefit from letting someone else do it because that frees up time you can use to focus on core operations. More project time means more income, which helps offset the costs of factoring. The other thing that helps is the predictability of those costs. With a little experience, it’s easy to fold them into your quotes so you preserve the same profit margins.
Shopping for a Factor
The key to dialing in consistent costs is building a relationship with a factor. That way, each time you submit invoices for factoring you’re pretty sure how costs are calculated, giving you a way to do a quick back of the napkin calculation on what to expect. It also speeds up the approval process when your factor already knows your business and its clientele, especially if you work to keep non-paying customers off your books. That is really all it takes to trim most of the work out of your receivables process.