You have decided that you need to increase the cash flow in your business to reach a goal (making payroll, investing in a new marketing channel, paying past due taxes, etc.).  You’ve done some research or heard from a friend or advisor that factoring is a great financial product that unlocks cash today based on your outstanding accounts receivable.  So, what should you do next?

Whenever someone begins a new project of any kind, it’s a great idea to use the “KISS” method.  I’m not talking about the Gene Simmons KISS method.  That would be an entirely different article to write.  Rather, use the “Keep It Simple, Silly” approach.  In line with this KISS methodology, I believe the four high-level steps you should follow to access cash from a business invoice are comprised of the following:

Understand Your Outstanding Accounts Receivable (aka “Aging Report”)

  • Credit worthiness of your customers.  Take the time to pull a research report from one of the public credit rating agencies such as, Dunn & Bradstreet, or Cortera.  Know up front how strong or weak your customers are because an invoice factoring firm is undoubtedly doing their due diligence when you are seeking a factoring relationship.
  • Payment terms.  If you have a dozen or more customers, take the time to put a spreadsheet together that shows which customers have been offered which terms.  If they are all offered the same payment terms, the process will be fairly simple.  If not, it’s important this analysis is important to track if your customers are actually paying invoices on time, early, or late.
  • Payment history.  You should look to see the actual days outstanding between invoicing and payment date.  This becomes important information for you to consider when moving forward with a factoring company because the longer the time it takes to get paid with each customer, the more it costs your company in finance charges.

Choose Which Customer Invoices You Want To Factor

  • Solid customers are the best choice.  Unfortunately, most people tend to think they need invoice financing when it is a bit late in the process and their customers are slow to pay.  Factoring is NOT collections on bad debts.  Rather, it’s a cash advance against a future customer payment that is highly probable and expected to be received.  I recommend choosing your best profiled customers (best credit rating and regular payment history) when deciding which customers you are factoring (if you are not factoring all of them).  The regularity of the expected customer payments smooths out your financing costs and present less risk to your business.
  • You don’t have to factor all your customers.  Work with a finance company that allows you to pick and choose the customers you want to factor is critical.  Many firms require you to finance all your invoices as they are trying to increase the total factored volume (and fees).  You should maintain the flexibility to only factor enough of your customer base to solve your temporary cash flow needs, and do so with your best quality customers (which reduces your risk and fees charged).

Find a Great Factoring Firm

  • Online Factoring.  Doing business online is a must.  In today’s fast paced business world, you need to deal with a finance company that takes advantage of the latest and greatest technology.  Even if your business is an “old-world” service company, you get more efficiency and save money if you choose to deal with a finance company that has up to date accounts receivable management processing capabilities.
  • Transparency.  Work with a finance company that provides you clear and accurate reporting and explanations for all charges to your account.  There is a lot of work behind the scenes that must be done on the administration side of the finance company providing the factoring.  Make sure you understand if/when you are charged for any of this work.
  • Client Service.  Just as in any industry or business, it’s VERY important to remember that you are the client.  Demand professional and quality client service.  Your job day to day is to run your business.  So long as your requests are reasonable, assume the same quality of integrity and promptness that you provide your own customers.  A quick test of a prospective factoring company is how smoothly the application process goes for you, so pay attention closely.

Manage Your Aging Well To Reduce The Cost of Financing Your Business Invoice

  • Time Is Money.  You’ve heard it over and over again, Time Is Money!  The same holds true in factoring. Typically finance charges are based on the amount of time your business invoice is outstanding.  Remember, factoring companies are NOT collection shops.  Stay on top of your outstanding Accounts Receivable Aging and call your customers when payments are starting to show up late.  Your attention to this area saves you money in lower finance charges.
  • Spot Problems Early.  By staying in consistent contact with the accounts payable department of your various customers, you may spot signs of problems early.  If the amount of time it takes to get paid begins to increase, make a point to call some other contacts you have at your customer to inquire why this may be happening.  The last thing you want to do is provide more services or ship more goods to a company with significantly deteriorating fundamentals.  You don’t want to get stuck “holding the bag” with unpaid invoices.