Which Accounts To Factor?
Is there a right account and wrong account to factor?
Let’s see – now, a majority of people assume that the best invoices to factor are the ones involving the most delayed payments. The best invoices to factor are the ones that pay soonest – within the agreed upon period.
Invoices that stretch to ninety or one hundred and twenty days or more are not good for factoring because the chances of them receiving payment against these are less. In fact, they may never be paid at all. So while receiving cash against factoring helps in the short term, it is not a comfortable situation in the long term, if customers do not pay. Not only will the business owe the factor money received in advance, but they will also owe the discount. It can be a problem, because customers who delay payments make a mess of your cash flow in the long term.
This is why factoring is successful only when you have creditworthy customers who are reliable and consistent with their payments. These could be customers to whom you have offered credit terms. It follows from this that if the customer does not have a good track record with making payments; don’t even consider him/her for factoring.
Here, it is important to understand that the primary role of a factor is not to manage collections from customers struggling to clear their bills. Rather, factors are funding businesses that invest in trustworthy and creditworthy invoices. Who wants to buy bad debt? Remember, if you do have payments that you are having a tough time collecting because they are problem ridden, the best option is a collection agency rather than a factor.
What if you have customers who pay promptly? (Cash on the barrel head)
It is not worth factoring such invoices. It is not that you cannot factor such invoices, because you can, if you need the money that desperately and find that the factoring rates are feasible. You will have to consider the fact that it might not be worth incurring a factoring discount when the payment will be received within a short time anyway. It also depends on when the factoring discount starts. If it is zero to thirty days, forget it. However, if the discount is effective on ten to fifteen days, customers who pay fast might be good candidates for factoring. The same goes for credit card customers who enjoy credit, even though you get paid promptly by the merchant and find it easy to fund your cash flow. Of course, credit cards cost less than factoring discounts so you might want to think twice if you are contemplating switching from a credit card to factor.