Invoice-based businesses often run into cash flow issues when they are busy due to the combined bad luck of a cluster of customer payments being mistimed while outgoing cash demands are high. Financing your receivables is a well-known way to normalize your income by providing yourself with a few pay dates you can count on when things get a little unbalanced. It’s not the only option, though. For many companies, factoring is a better choice, even if it is slightly more expensive under most circumstances.

Outsource Invoice Collection

The big difference between this option and AR financing is that when you sell invoices to a factor, you are done with them. You’ve taken the debt off your books at that point, and any risks related to customers defaulting on payment are no longer your problem. This is distinctly different from a financing agreement where you are still expecting most invoices will send you a reminder payment after they are paid.

This little difference winds up being a big deal when you plan for factoring because you can make the most of it. For example, if you know you want to reduce your bookkeeping work, you can bill once and then send the invoice out and collect your money. At that point, every part of collecting and processing payment beyond the initial invoice winds up being outsourced to the factor’s firm, and you can just focus on the productivity of your business. With more active project hours at your disposal, taking on big jobs that pay more is easier.

Keep Cash Flow Normalized

The other big advantage to replacing your regular billing process with frequent factoring agreements? You get to enjoy a steady cash flow without any hiccups in your cash cycle. That gives you more opportunities to work on your five-year plan without having to put out fires in the here and now. It also prevents additional expenses related to late fees and penalty interest on your other obligations.

Adjust Quotes to Absorb Costs

Once you figure out how much you are saving when you send invoices out and compare it to the cost of the arrangement, it’s easy to make some slight adjustments to your quotes to keep your margins where they need to be. It is also worth your time to ask the financing company you use how to reduce your factoring costs. When you’re a regular customer, they have ways of optimizing your entire process to be as cost-efficient as possible for both parties.