Factoring can be an elegant solution to handling receivables when your company is small and you’re looking for ways to keep the operation streamlined. Whether you’re simply not doing enough work to justify a full-time accounts department yet or you’re looking to streamline a high-income business that doesn’t require many core operators, it provides you with a way to get your invoices paid on a predictable schedule while outsourcing your collections and simplifying your bookkeeping workload.

Using a Factor vs. Financing

Financing receivables can also provide you with a way to outsource collections, but the fee structure tends to be more complex when working with those agreements. That’s because the later the invoice is paid, the more penalties may apply to the total fees you wind up paying. Factoring offers a lower up-front payment, but it also discharges the invoices and makes collection someone else’s issue. As a result, you get to move forward without having to revisit the issue, providing greater simplicity.

Selling the invoice also returns a greater percentage of the face value when it is not past due and the likelihood of on-time payment is fairly high. As a result, the cost of factoring recent invoices tends to be more comparable to the alternative than many business owners expect. As you work with a financing company repeatedly and your customers’ repayment habits become more predictable to them, the cost efficiencies tend to improve even more. At least, when your customers make a habit of paying on-time they do.

Communicating To Customers

Factoring your invoices to outsource accounts can confuse some customers, because many businesses have traditionally used this option to offload past due invoices when they are unsure about whether repayment is coming. As a result, some managers assume they are perceived to be in that situation, especially when you factor recent invoices. Looping them into your administrative strategy is all it takes to set minds at ease, though. Just let them know you outsource payment to a factor to keep your operation simple and reiterate their payment agreement and account status at the time the invoice is factored. When customers understand it’s a managerial strategy you use regularly, they tend to go with the flow.

Factoring Costs

You might be wondering what you’ll wind up accepting as costs on your end of the deal. Too much depends on the age of the invoices, the number you’re financing, and your customers’ payment histories to predict that with any confidence. The most predictable thing that can be said is the more regularly you exercise this option, the more consistent your costs get, and the easier it is to account for them when quoting work.