- 12 Aug
Factoring Can Improve Profitability
Most people may assume that invoice factoring will come at a cost, and hence will reduce your profitability, however the opposite may be true.
How Factoring Can Increase Profitability
Using factoring may actually increase your profits and business' profitability. I noticed an interesting post the other day, suggesting that factoring can actually help your company become profitable, so I wanted to set out how that might work.
This is something that many businesses are unaware of, there are a number of different ways that factoring can actually help you to increase your profitability, rather than reducing them.
Outsourced Credit Control Service
As part of a factoring facility, you receive an outsourced credit control service. The quality of this service will vary greatly between providers but assuming that you Pick a quality provider, using an outsourced so this could mean that you don't need to employ credit control staff yourself (or as many credit control staff), and this could be a significant overhead for your business.
Cash Flow Improvements
Factoring can deliver a variety of cash flow benefits. We often find that a factoring company is able to achieve a better debt term than a client business can achieve themselves. This is due to the use of professional credit controllers, reputation (in some cases) and a systematic process to ensure that gets paid as quickly as possible. Factors know all the tricks to get paid quickly, like who to call in large organisations.
This can have a significant cash flow benefit for your business. For example, a business with a sales ledger of say £100,000 outstanding, and with debts being paid in 60 days (hence 100K is 60 days sales outstanding), each one day reduction in that debt could create a cash flow benefit of approximately a £1.6 K. This cash flow benefit could offset borrowing, reducing the cost of borrowing. We have clients that use just the credit control service only as they appreciate the value of this benefit.
The fact that you receive invoice prepayments, typically 85 to 95% of your invoice values, means that you will have a far greater amount of cash available to your business.
You can use this cash to solicit early payment discounts from suppliers. For example, instead of paying for services on a month-to-month basis, you may be able to secure discounts, typically c. 15%, by paying annually.
Trade creditors may be prepared to offer you discounts if you pay on cash terms rather than taking 30 days plus credit terms. The cash from a factoring facility could allow you to do this. These types of discounts will reduce your outgoings, subsequently improving your profitability.
We have put together a factoring benefits calculator that can demonstrate the possible cost savings, and in some cases deliver factoring that is cost neutral or even a boost to profitability.