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6 July 2011,
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Should I Factor my Invoices to a Finance Company?

6 July 2011
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I have cashflow turnover problem. The collection is far slower than payables. Should I factor my invoices to a Finance company? The finance company needs to inform all my customers that our invoices are factored to him… I worry this will deter our customers’ confidence on us.

Brad Sugars answers

What is the current aging of your accounts receivable?

Do you actually publish terms to your customers? For instance, do you offer 30 day terms, but your average aging is 60?

Do your current clients know if they are paying you promptly, or if they are “holding out on you”?

They can only pay you promptly if you’ve given them a due date. I don’t think that you are risking relationships if you’ve got published due dates and people are holding out because, after all, they know that they aren’t paying you.

Setting a date could solve your problem pretty quickly.

If you are already doing those types of things, and your cash gap remains, factoring makes sense if the finances permit you to factor and still make a reasonable profit.

Can you find a company to work with you who will make the process “transparent” to your customers and won’t cost you an arm and a leg?

Factoring can be a solution, but normally not a preferred one. The effective cost of borrowing is often quite high when using these firms.

Do your contracts or sales agreements list the terms, and show discounts or interest for payment received after those dates?

Are you issuing invoices immediately as soon as they become billable or as soon as they are produced, or at minimum the same day that they are shipped?

Do your invoices clearly state the terms and discounts or interest?

Do you have system in place to actively follow up on your accounts receivable?

Finally, I don’t know what your business is, but you could consider deposits in some cases, or, even look at your most delinquent clients.

If they don’t pay, maybe they are costing you more than they are worth. Fire them.

If you have done all this, and the cost of borrowing through factoring is less than any other sources you have, factoring could be worthwhile, but only explore that option after you’ve gone over the others.

All the best,

Brad Sugars

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