So, cash flow forecasting and cash management become much less challenging. When you factor sales invoices, you can be confident of receiving most of the cash from sales invoices within 24 hours. And you may also benefit by reallocating employee time to more productive tasks. But, if you have a high monthly volume of sales invoices, the annual admin cost could be significant. How much you save on administration costs will depend on the volume of sales invoices. And the costs of the supplies used for sending reminder letters and statements will also be eliminated. You will no longer have the time-costs of chasing overdue invoices. The factoring company will pay for credit checks, for example. When you outsource your accounts receivable to a factoring company, you will eliminate the AR administration costs.
Related: How to Know if Your Business Qualifies for Sales Invoice Factoring Reduction in AR Administration Costs
And a factoring company will employ a professional team to carry out the task of collecting unpaid invoices. Bad debts are likely to reduce when you outsource AR management because the factoring company will credit-check new customers for you. However, if the agreement includes AR management, you can also expect your debts to fall.
In a recourse factoring arrangement, unpaid invoices will be charged back to you. Even so, a non-recourse factoring arrangement will eliminate the cost of most bad debts. However, there may be some situations in which the factoring company will not bear the cost. So, in most scenarios, you will not need to repay advances made to you if invoices are not paid. If you sign up for a non-recourse factoring service, the factoring company will bear the risk of bad debts. So, this, too, needs to be included in the cost-benefit analysis. But, depending on the type of agreement, accounts receivable factoring can reduce or eliminates bad debts. Unfortunately, bad debts are a fact of life and most small businesses incur bad debts amounting to an average of 2.7% of revenue.
So, the first item on the plus side of your cost-benefit analysis is the interest saved on alternative forms of working capital finance. And that float of cash is topped up as new customer invoices are issued.įactoring can reduce or eliminate the need for other financing solutions, such as overdraft facilitates or bank loans. That advance, ranging from 85-95% of the invoice value, will provide an instant increase in working capital. When you first enter into a factoring agreement, you will receive an initial advance against your current accounts receivable. Reduced Need for Other Forms of Financing Here is a list of the benefits to be accounted for in a sales invoice factoring cost-benefit analysis. Other advantages must be quantified, too. So, a cost-benefit analysis of factoring is not restricted to a straightforward comparison of interest rates. And the extra money realized can be put to many uses. Benefits of Sales Invoice Factoringįactoring reduces the time it takes to realize cash from accounts receivable. This article offers an explanation of the benefits and costs of factoring to help complete your cost-benefit analysis.
Even so, the costs and benefits can be quantified and compared. And the fees and charges levied by various factoring companies will differ, too. The value of savings to be gained from factoring will vary by company. Even so, it is advisable to quantify and weigh the costs and benefits before you enter any financial agreement. But for most businesses, the cost-benefit analysis of factoring is somewhat more complicated. The above scenarios are relatively clear-cut. And, of course, if a business is a cash-only operation, you will have no accounts receivable accounts (AR) to finance. In that case, the benefits you would gain from factoring invoices would be minimal. Suppose your business raises only a few invoices and customers settle their accounts within 15 days, for example. Invoice factoring is not a suitable financial solution for every business. A quick guide to the benefits and costs of invoice factoring