One of the most important assets of a business is your accounts receivable. Without proper cash flow, you cannot continue to pay for labor, equipment or product and your business will fail. In dire cases, when companies do not know where to turn next for cash flow, businesses will turn to accounts receivable factoring. So, what exactly is accounts receivable factoring?
Accounts receivable factoring, or invoice factoring, is a quick way for struggling businesses to get cash. An accounts receivable factoring company will buy your invoices for about half of what they are worth. This gives a company the cash they need immediately that they couldn’t have received collecting on the invoices themselves. Once the account receivable factoring company has collected on the invoice, they will deduct what you owe them for their work and services and give you what is remaining. You will never collect on the full amount of the invoice.
Although accounts receivable factoring may be helpful in a pinch, it’s not the answer to gaining instant cash flow. Instead we have a few tips for staying proactive on your accounts receivable so you always have cash flow and never need to turn to accounts receivable factoring.
Any time you waste by not invoicing your customer, is time that will be wasted not getting paid. If you expect customers to pay you as soon as possible, you need to be invoicing them as soon as possible. This will allow you to get any disputes or issues out of the way quickly and get down to actually collecting your cash.
Check Credit Reports
Before offering credit to any new customers, you should have them fill out a credit application. In addition, use trade credit reports to find out how their payment history looks. If a customer has a questionable history with paying on time, then you should reconsider doing business with them. If you’re looking to avoid accounts receivable factoring and increase your cash flow, its best to work with trustworthy customers.
Offer Payment Options
Checks are no longer the best option to get paid quickly. Many businesses are taking advantage of credit card and ACH payments because of their efficiency and less issues that arise. You are never waiting for a credit card or ACH payment to arrive in the mail, it can take place in less than 24 hours. Customers will also appreciate being able to self-serve these payments rather than using their time and resources to write out and mail checks.
Accounts receivable factoring should truly be a very last resort to gain more cash flow in a pinch. Instead of being reactive and needing to look for help quick, try these tips to being proactive towards your cash flow. This will help to keep your accounts receivable in order before you run into cash flow issues.