The CFO'S Perspective

Invoice factoring, also known as accounts receivable financing, improves cash flow by selling your company's outstanding invoices to a factoring company for a fee. As with any financial strategy, it's crucial to understand these risks and weigh them against the potential benefits. Invoice factoring can be a powerful tool for improving cash flow, but it needs to be used wisely as part of a well-considered overall financial strategy.

In this article, we review and answer the following questions:
(Each links to your question/answer of interest.)

1. Factors to consider when deciding whether to use invoice factoring?
2. What are the risks when using invoice factoring?
3. What is the average cost of invoice factoring?
4. What types of businesses use invoice factoring?
5. When should a company use factoring?
6. Do factoring companies check credit?
7. How do you get your company approved for factoring?
8. Why is factoring so expensive?
9. How do I get out of a factoring company agreement?
10. Do you need a CFO to get invoice factoring?

With government assistance waning, business owners are evaluating other ways to improve cash flow.

Since slow-paying clients are one of the biggest killers of cash flow, some companies choose to sell their invoices to recoup some of that missing revenue more quickly. This strategy, known as invoice factoring, is a way for companies to get an infusion of cash from the products they have already sold or services they have already performed from a third-party that is willing to advance them the funds before customers pay.

Alternatively, companies that do not want to sell their invoices, and may not want, or can’t, pursue a line of credit with a traditional business bank, can borrow money against their invoices from a specialty lender. This strategy, known as invoice financing, not only improves cash flow but can also serve as a means of borrowing for businesses that cannot readily obtain other lines of credit.

Each strategy has differences to consider. Find out more about invoice factoring and invoice financing to determine which approach is right for your business.

Accounts receivables are a hot topic for business owners because they are the primary driver of cash flowing into the company. Unfortunately, in the US 39% of invoices are paid late and 52% of businesses have been asked by clients to extend their payment terms. This creates a difficult situation for business owners because late payments not only hurt cash flow management but may also serve as an early warning sign that payment is not coming.

Typically, the longer invoices remain outstanding the less likely they are to be paid. When invoices cannot be collected on, they become bad debt and are written off, erasing the revenue they would have generated for the hardworking businesses that earned them. Bad debt hurts short-term cash flow and long-term profitability. In fact, every year an average of 4% of accounts receivable are written off as bad debt, which equates to $400,000 in lost revenue for a company with $10M in sales annually.

So, what can you do to reduce your accounts receivables problems?

How quickly are you turning your Accounts Receivable to cash? Every business needs working capital to cover operating expenses, including inventory costs. You don’t want your cash tied up unnecessarily in accounts receivable. Collection of accounts receivable is essential to the health of your business. So, the faster you receive payment from your customers, the more cash you have in your business, and the faster you can grow your business.