Using Accounts Receivable Financing for Cash Flow
Offering invoice financing to customers is one of the key ways to attract them in many industries, especially if you are a wholesaler or provider of B2B services. Unfortunately, allowing wide windows for repayment makes cash flow unpredictable, even when business is booming. Rationalizing cash flow without compromising on the value of invoice plus financing means finding the right product to support your needs. Most businesses in this situation choose either accounts receivable financing or factoring to make cash flow consistent.
Factoring vs. Financing: A Choice
The application process for both financing and factoring is very similar, and many factors offer both services. The key distinction is whether you are clearing the invoice from your books or not. AR financing is a cash advance against money oweed, with flexible fees based on whether clients pay on time, so there is often a small backend payment to your business in addition to the advance. Factoring is essentially the sale of the debt, which means no backed payment and often a lower percentage of the face value up front.
Optimizing AR Financing Costs
The reason accounts receivable financing typically costs less than factoring is because it presents fewer risks to the lender. You can find zero recourse financing, but often there is a clause holding your business accountable if the client does not pay. With factoring, that risk passes to the factor. Minimizing the cost of the advance when financing invoices means tailoring your client list to cut loose those who do not pay or who chronically pay late. Older invoices cost more to finance, as do advances that let you pick and choose your invoices, so finance your entire receivables list regularly to get the best deal.
Cost Efficiency vs. Administrative Efficiency
While accounts receivable financing is the best way to minimize the directs costs of lending, it does require more administrative attention than factoring. If you’re looking to fully outsource your receivables process to simplify bookkeeping, then factoring presents that opportunity. Depending on the labor being offset, it could wind up saving you money by eliminating other expenses. This kind of indirect cost efficiency is often the turning point for companies considering which cash flow rationalization choice to go with.
Redirecting Customer Payments
Regardless of which choice you wind up using to get cash out of your invoices, you will need to communicate new payment instructions to your customers. Factors collect the money directly, even when invoices are financed and not sold. The responsibility of redirecting the customer falls on your business, but regular customers will catch on to the new process quickly with good messaging.
