How to Reduce the Costs of Factoring Invoices
Is your business strapped for cash? Oftentimes, when a business does not have a cash flow, they decide to factor accounts receivable for financing.
In this situation, the factoring company (Alliance One LLC) expects to earn a profit on the transaction and charge factoring fees for its various services.
With the overall goal being cash flow, a company should carefully consider the positives and negatives before moving forward with accounts receivable factoring.
These are five ways a business can reduce or offset the cost of factoring and continue to improve cash flow:
Early Payment Discounts
The first way a business can reduce or offset the cost of factoring invoices is by taking advantage of early payment discounts offered by suppliers and service providers. Typically, an early payment discount is 2/10 net 30. The vendor provides a 2% discount if the bill is paid within a 10 day time period, with the full amount due in the standard 30 days.
Although it appears that the savings are small ($2.00 for every $100) over time, it adds up. In addition, it will help offset the discount fee that is charged to the factoring companies charge the company. If you do not see an early pay discount on the invoice, simply ask your factoring company.
The second way a business can reduce or offset the cost of factoring invoices it to ask for a reduced price when you purchase bulk items from a supplier. If you can order 500 widgets for $1.00 each or 1,000 widgets for $.75 each it makes sense to take advantage of bulk pricing. In the end, this can equate to a savings of 25% or more. Before you decide to purchase items in bulk, ensure that the company will utilize the items and that they will not go to waste.
Target Fast Paying Customers
The third way a business can reduce or offset the cost of factoring invoices is to target fast paying customers. Time is money. The length of time it takes a customer to pay on the invoice has a direct relationship to the cost of factoring. If you factor accounts that are owed by fast-paying customers, this can reduce your factoring fees exponentially.
Delay Invoice Submission
The fourth way a business can reduce or offset the cost of factoring invoices is to make the term “Time is Money” principal work fo your business. You can do this by aging the invoices for 10-20 days before submitting them to us for factoring, as well as a relative cash advance at the time of purchase. Typically, customers that pay in 45 days can be turned into 30-day customers by first aging the invoice for 15 days prior to factoring it.
Increase Growth and Profit
The last way a business can reduce or offset the cost of factoring invoices is to increase profits by an amount greater than the cost of factoring. This can make economic sense due to the fact that an increase in working capital can provide funding that it takes to accept and fill another order. In addition, it can contribute to increased profit margins since many overhead costs are fixed and may not increase the cost of goods.