How can a business turn their account receivables to cash when they want to avoid factoring?
Here is an alternative solution to consider when a company does not want to discount invoices or doesn’t qualify for factoring.
It is a common problem…
A business delivers the goods or services, invoices the customer, and waits for payment. A business could demand payment upon delivery but many customers might take their business elsewhere. Rather than waiting 30, 60, or even 90 days many companies decide to sell or factor their invoices for an immediate cash advance.
However some companies do not want the expense of factoring or don’t want their customers notified of the factoring transaction. Others might want to factor but their invoices don’t qualify.
Rather than factor invoices for a discount, enterprising companies turn to their customers. By offering the customer a discount for paying the invoice early a business can receive payment faster. Rather than punishing a customer for late payment they are rewarded for timely payment.
A common approach is to offer terms of 1%/10 days, net 30. This gives the customer a 1% discount from the invoice amount if it is paid within 10 days. After the 10th day and up to the 30th day the full invoice amount is due. After the 30th day a late fee might be incurred.
A tiered approach can also be effective. For instance, a 4% discount if paid within 10 days and 2% if paid within 20 days offers a more aggressive incentive for a longer period of time. As long as the discount is less than the factoring fee the business and the customer have an opportunity to benefit.
Of course offering early payment discounts can affect the bottom line and demand additional time in managing account receivables. Plus, not all customers will take advantage of paying early causing unpredictable fluctuations in cash flow. In addition to reliability, a factoring company can provide credit and risk analysis when deciding on whether to extend terms to a new customer.
Offering early payment discounts to customers is one accounts receivable management tool that can be an effective alternative or addition to factoring. An experienced accountant or consultant can assist in weighing the cost versus reward benefits.