Forums: Discussions for entrepreneurs and small business.

Heard a lot about factoring on recent SuN shows. Just want to remind everyone that terms of an invoice are always negotiable.

On numerous occasions customers have placed large orders with us and cash flow gets tight. What we will do is offer 2% 10 net 30. Meaning if the firm that purchases the product pays within 10 days we give a 2% discount, after 10 days full payment is due.

This finance strategy has double benefits. First we usually get paid within 10 days and we can pay off any short term loans that we may have taken. Second (and possibly more critical) is our invoices rarely go past 30 days. I asked the accounts payable people why we were so lucky and they explained "Invoices with discounts go to the front of the line. We may not process them all in time but because there is an opportunity to save money that invoice will not be processed in the order received. It always receives priority."

Hope this helps.
 

-------------------------

great post, aron! very valuable.

-------------------------

Rich Sloan , Co-Founder, Chief Startupologist, StartupNation

Aron,

Thanks for the info.  I`m just starting out and although I plan on getting some bigger commercial clients, I have not had any up to now.  Just starting with a few consumer level clients. 

My question is 2%-3% typical for a discount when factoring?

or does that depend on the size of the order?

Brian,

Terms on an invoice are what you set. A typical range is from 1%-5% (
although 5% is a very large discount for only 20 days advance).

Factorers look at who the purchase order is from (because that is what they are buying). A P.O. from Dell will have a lower rate than one from a small company because the likelyhood of Dell defaulting is low.

I wish I could give you more of a range but it is a very negotiable deal.

Good luck



-------------------------

Hi Brian,

I would agree with Aron that an invoice discount is a great way to increase your cashflow. In my experience businesses that are integral suppliers to their customers have the best chance of having their customers take a discount and pay quickly.

 

It does not hurt to have a factoring line in place in addition to offering discounts for when you have to make payroll and that check from a customer you though was taking the discount and paying early doesn’t arrive and you have payroll or other critical obligations to meet.

The discount a factoring company takes on an invoice will usually depend on the time the invoice is outstanding and the risk of the invoice not being paid for whatever reason. Every deal is priced a little bit different and depends on a variety of variables that determine a factoring company’s risk of the invoices not getting paid. If you have a fairly credit worthy group of customers (the factoring company will help you determine this as part of the application process and if you become a client on an ongoing basis) whose invoices you are going to sell to the factoring company you can probably negotiate a 75-80% advance rate and a discount rate of 3% for 30 days and about 1% for ever 10 days thereafter.

Another thing to consider is that if you build your business to a point where you do franchise it and include factoring as part of the financing model it could benefit your potential franchisees by making it easier for them to finance their start up because it is fairly easy to get a factoring line as opposed to other start up business financing.

If you have more specific questions feel free to contact me directly and I will be happy to try to help answer them.

Good luck

I agree with BT - line up your credit facilities to supplement your working capital just in case your customers don`t use the offered discounts.  It`s always best to get your funding well before you actually need the money.

Also, factoring rates depend upon a variety of factors including monthly factoring volumes, the credit quality of your customers and the average days outstanding for your receivables.  The rates of 3% for for the initial 30 days will typically apply to lower monthly volumes.  For monthly volumes in excess of $1 million, you can see discounts in the range of 1.5% for the initial 30 days. 

Feel free to check out my blog at www.marshall-showmethemoney.blogspot.com or contact me at 310-371-4011 if I can be of further help.

Marshall

 

 

Thanks for all th info, Aron, BT, and Marshall.  I will definelty be looking into this further in the near future.  Thank you for the offers for help, and I will contact you if I have any questions!

Having factored my invoices for nearly 5 years ( having recently obtained a business line of credit,) I found it to be an invaluable tool when growing a business that doesn`t have much cash on hand. I paid 2% off the top, and having 85% of factored invoices, advanced.. I was lucky to find the company in Michigan and fortunate that the owner was both an attorney and CPA- someone who could also offer invaluable advice. As he said ( and my accountant cringed), "it is the price of doing business without adequate funds." He also said, any staffing company (such as mine) that used his factoring services went on to become more successful. We are currently working on the "more."

-------------------------

Your Personal Recruiter

Thanks Stu!  I think I will begin to research factoring companies.  I am sure that I may have to use factoring at some point, since mine is a bottstrapped op to begin with.

Does anyone know where to begin looking for these companies?

And most importantly what are some of the other things I should look for when selecting a factoring company to work with?

I appreciate everyones help!

Brian,

There is no shortage of companies that provide factoring.  The key is to find one that is interested in your industry, the amount of volume you can generate, charges a fair rate, and provides the services you may require.  As you`re in Canada, whether or not your business is purely domestic or will also distribute internationally should be a further consideration. 

My blog has a couple of postings dated June 27th on guidelines to factoring and benefits of factoring (www.marshall-showmethemoney.blogspot.com). Otherwise, feel free to give a call at 310-371-4011 if I can be of any assistance.

Marshall