In a recent conversation with a client who was gearing up for a rapid growth phase, he shared that he offset the cost of factoring by adjusting his price sheet.
While we realize that to remain competitive, most companies can’t simply adjust their price sheets so here are four tactics a business can use to reduce or offset the cost of factoring:
Tactic #1 – Recognize Early or On-time Paying Customers
There is a direct correlation between the length of time it takes a customer to pay on an invoice and the cost of factoring. By targeting invoices for customers who pay early or on-time, a company can reduce their factoring fees and cost.
Tactic #2 – Early Payment & Volume Discounts
Take advantage of early payment discounts and volume discounts. You can save 2 – 25% on raw materials cost if you have the cash to pay within ten days and order larger volumes. Instead of ordering x amount of components double you order if it makes sense to take advantage of bulk pricing which can sometimes equate to a savings of 25%. When these two purchasing strategies are coupled, the cost of factoring can be significantly reduced.
Tactic #3 – Timing of Invoice Submission
In the factoring industry there is a practice of “aging” the invoices for 5-10 days before factoring them. Even customers that typically have pay cycles beyond 30 days can be turned into 30-day customers by first aging the invoice prior to factoring. Policies on this strategy can vary by factor so it is best to discuss the parameters with your Account Executive.
Tactic #4– Stop Offering Early Payment Discounts
Once you begin factoring, you receive cash immediately. There is no longer the need to have your customers play as early as possible and to take a discount to do so.
For more information on invoice factoring contact Universal Funding at 1-800-405-6035.