Why Factoring is Necessary
"A sale is not a sale until you collect the money"
Are you a part -time banker for your customers?Take a look at
your accounts receivable aging schedule and count the number
of accounts over 30 days.Congratulations, you are extending
credit to those customers. You are not getting paid for delivering
your end of the deal in a timely manner and as a result
you are providing the use of your money to your customer for free.
Not exactly the business you thought you were getting into, is it?
Ask yourself this question: If those customers of yours went
to a bank, borrowed the same amount of time,
would they expect to pay a substantial
amount of interest for the privilege?
Of course they would!
And consider this: Not only are you receiving no interest on that money,
but most importantly,you are also losing the use of that
money while you are waiting for your customer to pay you.
What is the cost of not having this money available?
In essence, your customers are asking you to finance
their business by extending terms and allowing them
to pay in 30 days (and usually longer, right?).
But what is it costing you in "missed opportunities" when your
money is tied up in your accounts receivable?
What's a "missed opportunity"?
Here are some good examples:
-Materials offered to you by a supplier at below-market prices
-A chance to buy a piece of equipment at a bargain
-The opportunity to produce more during any given month
And the list could go on and on.
The cost of extending this credit to your customers has
to exhibit an effect somewhere. Someone has to pay the piper.
Either: A)you are absorbing the cost, resulting in lower profits,
or B) all of your other customers are paying higher prices
across the board. One way or another,
you are financing someone else's
business and perhaps losing money for the opportunity to do it.
Large companies are always looking for the most
inexpensive way to finance their operations and what
is more expensive than free?
They often use the "iron" fist in the velvet glove" approach.
With the glove they indicate that "we usually get 2/10, net 30 days" terms,
but the presence of the first suggests "we will go elsewhere,
unless you provide us with free use of your money for 30,60, or even 90 days."
The real irony here is that, in some cases, customers may
take the discount and still wait longer than 30 days to pay.
Large dollar "volume-buyers" have a lot of leverage over
small and mid-sized business and they will
usually get their "free money" terms somewhere!
With factoring you can win the battle with slow-paying clients!