When it comes to generating cashflow, businesses have a few options. You could offer discounts to customers if they pay their bills earlier. So, if a customer has payment terms that allows them to settle their bill after a period of 30 or even 60 days, you could encourage them to pay their bill before this to avail of a discount. You could also increase your prices or try to earn interest on capital by putting it into a high interest savings account.
Some companies that are struggling for cashflow will look at debt factoring. The experts at financial company Thales Financial say that factoring your invoices can be a quick way to access cash when you need it. But what is it and how does it benefit a business?
What is Debt Factoring?
Debt factoring is the process of essentially ‘selling’ your outstanding invoices to a third-party company. The company will typically pay the business owner the full amount of the outstanding invoice. Some factoring companies will advance between 80% and 90% of the invoice amount and will hold on to the rest until the invoice has been settled.
What are the Benefits of Debt Factoring?
This benefit of factoring your invoices is that you don’t have to wait for payment. This gives you the cash you need to pay your own invoices from suppliers on time, or even earlier. This means you can access any discounts that may be on offer for early payments.
Shrewd business owners can work debt factoring to their advantage, particularly if their own suppliers are offering generous discounts for early invoice payments.
Whether or not you can make the most of debt factoring will depend on the contract you have with a debt factoring company. To make such a contract work for you, you will need to shop around. The good news is that there are usually plenty of companies vying for your business, so you should be able to find the best contract for your needs.
Debt factoring can also work in your favor when it comes to later payers. You might find that some of your customers who are notorious for being late with their payments are more likely to pay on time when there is a third-party company collecting instead.
A non-recourse factoring contract, while more expensive than a recourse one, will protect you from bad debts. A non-recourse contract means that the factoring company is taking on responsibility for non-payment of debts.
Another great thing about factoring your invoices is that you don’t have the hassle of dealing with late payers. Most businesses have customers who always pay on time and who are a joy to deal with, but they also have some customers who always pay late. These customers will dodge phone calls and ignore e-mails and will be late with their payment every single time. This can be a huge headache for business owners, particularly when they are depending on the payment to settle their own bills. With a debt factoring company taking the reins, the business owner can essentially forget about this side of the business and get on with doing what they do best – running their business. For most, the cost of debt factoring is well worth the money for this service alone.
Debt factoring is something that can benefit a business in many ways. By allowing a third-party company to collect payment for your outstanding invoices, you don’t have to wait for payments, and you can avail of early payment discounts from your own suppliers. You can also forget about the hassle of chasing customers for payment every month.