5 Useful Invoice Factoring Tips
Invoice factoring is a powerful cash flow management tool available to any business that is actively generating accounts receivable, but it is important to know when (and how) accounts receivable should be submitted for factoring. Here are 5 tips that will make the factoring of your accounts receivable more effective and less expensive.
Tip #1 – Factoring must be part of the overall cash flow management process. Before you will know when you should factor an invoice, you must be able to predict the time and amount of cash flow shortfalls your business will experience. Click here to download DBR’s guide to cash flow management and an example cash flow spreadsheet you can use to track the cash flow of your business.
Tip #2 – No factoring company should tell you what invoices to factor or when you should submit your invoices for factoring. One of the great benefits of factoring is the ability of a business owner to decide what invoices they want to factor, when they need to factor and how much money they need from each factoring transaction.
Tip #3 – Factoring can be especially helpful with your customers that slow-pay your invoices. Unfortunately, some of your customers will promise to pay your invoices in 30 days but delay your payments for 45 to 60 days. If invoices with slow-pay customers make up a significant percentage of your monthly accounts receivable, factoring can be used to turn some of those old invoices into immediate cash.
Tip #4 – It is important to understand how fees are being charged on your factoring deals so you can properly time when you factor an invoice. Many factoring companies charge their fees on the basis of three 10 day segments in each month. With these companies, the full amount of the fee for each segment of the month will be charged whether the invoice is paid on the 1st day of the fee segment or on the 10th day of the fee segment. In contrast, for all invoices over 15 days old DBR charges fees on a daily basis so DBR clients only pay for the actual time of the factoring transaction.
Tip # 5 – Because the fees associated with factoring are higher than with other forms of business funding, the money received from invoice factoring is best used for payment of the day-to-day expenses of your business such as payroll, rent, office expenses, hiring new employees etc. Other forms of asset based lending can be used to purchase inventory, equipment, vehicles and similar expenses.
Properly used, accounts receivable factoring can be a very helpful way to deal with cash flow shortfalls faced by your business. To learn more about the benefits of Invoice Factoring, please contact DBR’s COO, Ben Gage by phone at (760) 738-1400 or email at Ben(at)dbrfactors.com.