Managing and getting paid on your accounts receivbale is crucial to the success of any business. Whatever your business does, there is no doubt that you are an expert in that field, however, you most likely aren't an expert on accounts receivable. That's why we are here to help you out, our business is accounts receivable. Here is a collection of our blog posts pertaining to accounts receivable so that you can learn a bit more about how to manage this often overlooked, but very important aspect of running a successful business.
It is quite common for consumers to be offered financing options when making a large purchase. While a home mortgage or car loan might be the first two things that come to mind with consumer financing, it is quite common for consumers to receive financing when purchasing other big ticket items such as furniture or appliances. Being offered a payment plan that allows a consumer to make monthly payments over a specified period of time allows them to purchase big ticket items that they may not be able to afford otherwise. However, in the world of B2B (business to business), payment plans are not available, instead businesses are offered net payment terms. With a net 30 day invoice, a business is given 30 days to pay, but must pay the entire balance after 30 days. Offering longer payment terms will benefit the company purchasing a product, but will hurt the vendor as they need to wait even longer to get paid or pay a higher fee to factor the receivable. However, there is a happy medium and that is offering net 30-60-90 day terms.
Net 30-60-90 day terms is a simple way of offering a business a payment plan. They pay one third of the invoice in 30 days, another third of the invoice in 60 days, and the final third of the invoice in 90 days. While it may not be the same as the 36 months a consumer gets to pay for a new sectional, it does still allow the business to spread out payments over three months and make smaller installment payments rather than pay the full balance all at once.
From the vendor’s point of view, it is much better to offer customers net 30-60-90 as opposed to just offering them net 90 day terms. Receiving a portion of the invoice after 30 days, another portion after 60 days, and the balance after 90 days, instead of waiting for 90 days for the entire amount, helps improve cash flow. If the vendor is factoring the account, while they would get funded when the order ships in either scenario, they are able to reduce the factoring fees if they are offering net 30-60-90 day terms. Instead of having to pay a fee for net 90 day invoice, the vendor is effectively only paying a fee for net 60 day invoice since the payment terms average out to 60 days.
Another benefit of net 30-60-90 day terms over net 90 day terms is that is makes it easier for the customer to make the payments. Paying for a third of an invoice is always much easier than having to pay the entire balance. Even though the entire invoice still gets paid over 90 days, its oftentimes easier for a business to pay a smaller amount several times than to make one large payment all at once. For one it is much easier to budget for as it is smaller monthly payments, but there is also no need to set aside money each month for a large payment that is due in 90 days.
If you feel you could benefit from offering your customers net 30-60-90 day terms but are worried about how it may affect your cash flow, now would be a great time to consider factoring. DSA Factors is a family-owned and run business that has been factoring for over 35 years. We work with a wide variety of industries and also have the ability to provide purchase order financing. Give us a call today at 773-248-9000, email us at firstname.lastname@example.org, or chat with us right here on this web page to learn more about how you can offer your customers more time to pay.
For many small wholesalers, the decision to offer net payment terms is oftentimes one of the most difficult business decisions to make. While it may seem easier and safer to just take a credit card, from a customer’s point of view it is the exact opposite. There are even situations where credit cards may not even be an option. In order to determine whether it is time to start offering net payment terms to your customers, it is important to look at several factors. Why do customers prefer net sales terms, How do you take the risk out of net sales term, how to you manage accounts receivable, and how do you maintain healthy cash flow.
Perhaps the most important reason why a customer would request net payment terms is so that they have time to pay for their merchandise. While it would be simple to argue that charging an order to your credit card means that they don’t need to pay for it until their next statement becomes due, the amount of time they have to pay can vary by an entire month depending on if they are near the start or end of their billing cycle. This means that when paying with a credit card they will have somewhere between 15 to 45 days to pay for their merchandise. The big problem of course is that if they are unable to pay their credit card on time, they will be assessed late fees and interest for not making a payment on time. With net payment terms, customers know that so long as they pay their bills within a reasonable amount of time, they will not be charged any interest, and there are never any late fees. So, while they can’t wait 90 days to pay a net 30 day invoice, if it takes them 45 days it shouldn’t be a problem. As a result, they may be willing to place a larger order if offered net payment terms as they won’t be as worried about needing to make a payment exactly on time.
There is also the case of customers who need more than 30 days to pay. For seasonal businesses, such as garden centers or gift stores, they will need to place the orders early for their busy season. So whether they sell outdoor products and need to stock up for the spring and summer, or sell gifts and décor for the holiday season, they may ask for longer payment terms than just 30 days. It is not unusual for seasonal businesses to request extended terms of 60 or 90 days, which is something that a credit card company will never offer them.
Another issue with paying via credit card is credit limits. While it is true that there will always be a credit limit whether paying with a credit card or getting net payment terms, companies are able to purchase more when they are given net payment terms. A credit card has a strict credit limit which applies to everything that the business purchases with it. For a business placing orders at a large trade show, they need to be conservative with how much they charge to their credit card with each vendor or they will risk maxing out their credit limit before they are able to place all of their orders. Furthermore, they most likely already are using their credit card to pay for business expenses such as cleaning supplies, phone and internet, advertising, and in the case of a trade show, their flight and hotel, meaning they have less credit available to spend on merchandise.
This also is problematic with seasonal businesses as their credit limit may be sufficient for them to make purchases on for most of the year, but can become woefully insufficient as they stock up for their busy season. As a result, any wholesaler who sells seasonal products may face even greater difficulties in making sales if they require their customers to pay via credit card.
Of course, if you offer your customer net payment terms, you will still need to impose a credit limit on them. You don’t want to overextend to a customer or they may have difficulty paying you back. However, if all their vendors establish appropriate credit limits for them, then combined they should have more credit than what a credit card would give them. Furthermore, as you develop a good working relationship with a customer, you will be able to gradually raise their credit limit over time so that they will be able to order more from you in the future.
Finally, there is the issue of selling to major retailers. One of the best ways to quickly grow a business is to get into a major retailer such as Target or TJ Maxx. Not only are the orders they place very large, but they have the ability to get your products out to large number of consumers all across the country, which of course is a great way to expand your sales territory and market your products. While it is possible that you may be able to negotiate the price of your merchandise with the major retailers, one thing you will not be able to negotiate with them is the payment terms. Refusing to accept the payment terms that they are requesting, or simply trying to negotiate the sales terms, is the easiest way to lose a sale, and even worse, losing future sales. While it may seem unfair that a multi-billion-dollar corporation is asking you to wait to get paid, the simple fact is you need their business, if you are unwilling to play along then they will simply find another vendor who will.
Another thing that major retailers look for is long term relationships. If they are going to make the investment in selling your product at their stores, then they want to make sure that the shelf space they are giving you will always carry your product. For many major retailers, most notably Walmart, they associate the ability to offer net payment terms with stability and financial strength. A company that can give them 60, 90, or even 120 days to pay has their finances in order and will be around for many years to come. A company who is requesting payment via credit card may not even be around in one month’s time when it is time to place a reorder.
It can be very difficult for most SME’s to deal with all the challenges associated with net payment terms. There is a need to perform credit checks to make sure that the businesses that are being offered net payment terms are credit-worthy and will pay their bills. Even if a business is credit-worthy, you still need to send out reminders and make collection calls in order to get paid on time. Of course, you can do everything that you need to do in terms of credit checking and collecting, but sometimes even when you do everything right things can still go wrong and a customer can unexpectedly go bankrupt or out of business, meaning that you will be stuck with bad debt. Of course, perhaps the biggest problem for any SME that offers net payment terms will be managing their cash flow. Instead of being paid instantly by a credit card company, with net payment terms you will need to wait 30 days or longer before you get paid, making it difficult to pay your own bills.
Luckily, there is a simple solution to all of the above problems, that is accounts receivable factoring. With accounts receivable factoring you eliminate all the work and stress associated with net payment terms, plus you get paid just as quickly ensuring that you have healthy cash flow as well. With factoring, you are selling your receivables, or invoices, to a factoring company who will pay you for them the same day you bill your customers. They will also handle all of the credit checking, collection work, and insure your receivables against non-payment. So basically, you are outsourcing all the work associated with net payment terms, eliminating your risk, and getting paid just as quickly as you would have if you had charged a customer’s credit card. Best of all, the cost of factoring is comparable to a credit card processing fee.
If customers are requesting net payment terms, don’t let the fear of offering terms get in the way of doing business with your customers. Instead, give DSA Factors a call today at 773-248-9000, email us at email@example.com, or chat with us right here on this web site. We have been providing accounts receivable factoring for over 35 years and have the knowledge and expertise to allow you to take the next step forward in doing business with your customers. At DSA Factors we make net payment terms easy.
When it comes to factoring there are a lot of different aspects that need to be looked at when determining the best factoring option for your business, however, the decision between recourse and non-recourse is probably the most important. Quite simply, recourse means that if a customer does not pay an invoice, then you are responsible for paying back the advance you received on that invoice. Non-recourse on the other hand means that you are insured against a customer who doesn’t pay for an invoice, so there is no need to pay back the factoring company if they don’t pay. While this may seem like a simple difference, there is actually a lot more to it than what these simple descriptions state.
With recourse factoring you are receiving an advance on your invoices, but your factoring company is not purchasing your receivables, they are simply offering you an advance. While your factoring company will try to collect on your invoice on your behalf, ultimately you are responsible for paying back your factor if one of your customers does not pay for an invoice that you received an advance on. Of course, you won’t be asked to pay back this advance on the day that the invoice is due. While the exact amount of time may vary between different factoring companies, typically you’ll be asked to pay back your factor once an invoice becomes 90 days beyond terms. Some factoring companies may demand the entire value of the advance at that time, while others may be willing to work with you to set up a repayment plan. The terms of repayment are something that you would have to discuss with your factoring company.
With non-recourse factoring your factoring company isn’t just providing you with an advance, but they are actually purchasing your invoices from you along with all the associated risks. Non-recourse factoring is much more than just receiving credit insurance with an advance, because with non-recourse factoring there is no need to file claims, there are no minimums or deductibles that need to be met, and there are no premiums to pay. It is important to note that non-recourse factoring covers you only in situations where a customer is unable to pay, and it is important to understand which situations your factoring will cover. All factoring companies will cover you in the event that a customer files bankruptcy or goes out of business, although not all factoring companies will cover you in the event that a customer is simply a deadbeat. What isn’t covered is customer satisfaction, for example, if a customer takes a deduction because a product arrives damaged, it is still your responsibility to take care of it, whether that is providing a replacement or offering a credit. In general, factoring companies will hold back funds in reserve that are intended to cover them in the event that a deduction is taken. The amount of reserve taken depends on the factoring company but typically falls between 10-20%. Once a factoring company receives payment for an invoice, they will return any funds held in reserve to you. It is important to note that even with recourse factoring, your factoring company will still hold 10-20% in reserve.
While it is clear that non-recourse factoring offers benefits that recourse factoring does not, there of course is more that goes in to the decision between recourse vs non-recourse. You also need to consider cost, approval rates, collection efforts, credit limits, and debt.
Some factoring companies may offer you an option between recourse and non-recourse factoring, and in this case they may offer a lower rate for factoring with recourse. Other factoring companies will only offer one option. However, just because one factoring company may offer a lower rate for recourse factoring, that doesn’t mean that it is necessarily the best rate. There is a lot that goes into a factoring rate, and recourse vs non-recourse is just a small part of it.
Besides differences in the rates of factoring, there are other costs that you need to consider. With non-recourse factoring there is no need to purchase credit insurance, however, you may wish to purchase credit insurance if you are using recourse factoring. In this case, you need to consider the cost of premiums as well as minimums and deductibles. It is also important to note, even I you file a claim at the same time that your factoring company asks you to return an advance you received, it could take anywhere between 30-90 days to receive payment from your insurance company.
Should you choose to forgo credit insurance, then it is important to consider what your losses may be. This is a little bit more difficult to calculate and these numbers can fluctuate wildly between any given year, and it can be very difficult to predict when the next economic turndown will take place which could lead to higher losses than expected. In general, to figure out these costs, you probably will need to look at a decade’s worth of data, and even that won’t prepare you for extreme events such as the COVID-19 pandemic.
Another thing that some factoring companies promise is a higher approval rate with recourse factoring, although this can be difficult to substantiate and actually may not be beneficial at all. Performing credit approvals is a very important aspect of factoring and one of its primary benefits. Your factoring company will check out the credit worthiness of your customer before you produce an order to ensure that your customer ultimately has the means to pay you for it.
With larger invoices, for example an invoice for $100,000, there will be little difference in the credit approval process between recourse and non-recourse factoring. Both types of factoring companies will do a deep analysis of the customer to ensure that they are credit worthy. In the case of the non-recourse factoring company, they will ultimately be out the money if a customer is unable to pay. However, the same is true of the recourse factoring company as most likely you will not have $100,000 available to pay them back in the event that a customer does not pay. So in all likelihood, there is very little difference in the approval rate of large orders between recourse and non-recourse factoring.
Where you may see a difference in approval rates is with smaller orders. An order for $250 may receive two very different approaches. A recourse factoring company may not even bother to credit check the customer and may just automatically approve your order. To them, if the customer is unable to pay, they know that you will be able to afford to pay them back the $250. So while they are giving you a credit approval, they are actually doing you a disservice as they may be sticking you with bad debt. A non-recourse factoring will run the appropriate credit checks knowing that they will be out $250 if the customer is unable to pay. That doesn’t mean that the non-recourse factoring company is unlikely to approve them, most factoring companies are willing to extend a small line of credit to new businesses or businesses that haven’t established any credit yet. However, if a factoring company is willing to give a small line of credit to a company that is trying to establish credit, they are assuming all the risk associated with doing so.
One of the main benefits of factoring is that your factoring company handles all of the collections for you. However, just like with credit approvals, recourse and non-recourse factors may take different approaches when it comes to collecting. For a large order there is little doubt that a recourse factoring company will try their hardest to collect it, knowing that if they can’t collect it will be very difficult for you to pay them back. It is the small orders that are more problematic. If a factoring company is having a difficult time collecting a several hundred dollar invoice, they may give up if they feel it would be easier just to collect the amount from you. The same can not be said of a non-recourse factoring company. Since they are on the hook for the invoice, they will work their hardest to collect even on the smallest of invoices. Of course, whether or not your factoring company is able to collect, you have nothing to worry about as you are fully insured.
There really shouldn’t be any difference in the credit limits assigned to your individual accounts by either recourse or non-recourse factoring. Assuming that they are credit checking the customer, their credit limits should be consistent. However, if a recourse factoring company isn’t really checking out your accounts in too much detail because they can charge back an invoice to you, then they may assign a higher credit limit. However, where credit limits come into play is when it comes to sending funding for you. A recourse factoring company may assign you a credit limit across all of your accounts to ensure that invoices don’t get paid, that you will have the ability to pay them back still. Presumably, most accounts are going to pay, so this credit limit should be very high, however, it could prove to be problematic if your business starts growing at a faster rate than expected or you get a very large order. On the other hand, you have no credit limit with a non-recourse factoring company. Since you have no obligation to ever pay back your factoring company, you have no debt with your factoring company. As a result, the sky is the limit when it comes to how much you can factor with non-recourse factoring.
The final major difference between recourse and non-recourse factoring is debt. One of the best features of factoring is that it is a form of debt-free financing. Certainly this is true in the case of non-recourse factoring where your factoring company is purchasing your receivables and you are under no obligation to pay them back, the receivables will be paid back by your customers. However, this isn’t entirely true with recourse factoring. While the vast majority of your customers should and will pay their bills, you are still responsible for the ones who don’t. When a customer is unable or unwilling to pay, it becomes your obligation to pay back your factoring company, meaning that you are in debt to them.
While it would be simple to say that non-recourse factoring is better than recourse factoring, it is just one of the aspects that needs to be considered in determining which factoring company is right for your business. Oftentimes the industry that you work in will determine whether or not non-recourse factoring is an option and which factoring company would be the best fit for you.
At DSA Factors we are proud to offer non-recourse factoring to all of our wholesale clients. We are a family owned business that has been factoring for over 35 years. If you have any questions about factoring, whether they pertain to non-recourse or any other aspect of factoring, please don’t hesitate to give us a call at 773-248-9000, email us at firstname.lastname@example.org, or chat with us right here on this web site.
As the old saying goes, it takes money to make money. One of the most important parts of running any successful business is having the finances available to keep it running smoothly. While financing can be difficult for any business, it is often most difficult for businesses that operate B2B, or business to business. To understand why financing is so crucial for B2B businesses, it is important to understand the differences between B2C (business to consumer) and B2B (business to business).
Business to Consumer, more commonly known as B2C, would be a retail business. When people think of businesses, it is B2C businesses that typically come to mind first. Whether it is a restaurant, clothing store, barber shop, or bowling alley, all these businesses deal exclusively with the end user of the products or services they are selling, consumers. For businesses that operate B2C, sales are typically small, and they make lots of separate sales. For example, a restaurant’s typical sale may only be $100, but they will serve 50 families at lunch time. A barber shop may only charge $25 for a haircut, but each hair stylist may see 25 customers each day. The transactions are small, and typically most consumers will either pay them with cash or credit, as a result, financing isn’t a huge problem for B2C businesses.
Of course, not all B2C businesses deal with lots of small orders, some have larger orders and make fewer sales. An example of this would be a furniture store, where maybe they only make a handful of sales each day, but each sale is for several thousand dollars. As a result, financing does become a concern for these businesses because many of their customers may not have the ability to pay several thousand dollars all at once. This is why furniture stores typically partner with banks to offer their customers consumer financing. This gives their customers the ability to pay for a $3000 bedroom set over the course of a few years. A more extreme example would be a car dealership, where pretty much every customer is going to need to finance the purchase of their car. Again, this is handled by banks who can utilize tools such as credit scores to offer financing options to consumers. In these situations, financing plays a major role in the day-to-day operation of some B2C businesses as their customers need to be offered financing if they want to make a sale. However, the financing is for the consumers, not for the business.
Business to Business, more commonly known as B2B, refers to the companies who supply to the B2C businesses. For example, a B2B business would sell the lettuce to the restaurant so that they can make salads, they sell the shirts to the clothing store for them to hang on their racks, they sell the shampoo to the barber shops so they can wash their customers’ hair, or they sell the pins to the bowling alley so that bowlers can get a strike. However, besides the fact that they are selling to businesses and not consumers, there is another very major difference between B2C and B2B, B2B orders are always much larger than B2C orders. While a diner in a restaurant isn’t going to ask to finance their $10 salad, the restaurant is going to need to purchase 100 heads of lettuce to make all of their salads for a day, plus large quantities of other foods as well. It is quite possible that a restaurant will purchase thousands of dollars worth of food each day, on top of making payroll, paying rent, and paying all their other expenses. As a result, they are going to ask for time to pay for that food, typically thirty days. The same is true of the clothing store who is purchasing a handful of different styles of clothing in a wide variety of sizes, the barber shop who needs purchase large quantities of shampoo, conditioner, and other styling products, or the bowling alley who has to purchase many pairs of bowling shoes and even new pins occasionally. In all of these examples, orders are going to be large and the customer, the B2C business, is going to want to have time to pay for them. In all of these situations, the B2B business is going to have to offer their B2C customers financing and give them thirty days to pay. In the case of furniture sellers or a car manufacturer, this is even more important. Furniture stores may be placing orders of $10,000 or $20,000, and a car dealership can easily place orders that reach into the millions, and both are going to need time to sell the product to pay for the orders. So, it is crucial for pretty much any B2B business to offer financing to their customers.
So, it is clear that offering financing is a major part of running a B2B business. However, unlike retailers who are able to partner with banks to offer consumer financing to their customers, there are no banks who are going to partner with a B2B company to offer their customers financing. While banks may be willing to offer a business loan or line of credit to well qualified businesses, the process requires that the business shares financial statements and establishes a relationship with the bank. Oftentimes the business would be expected to have checking and savings accounts with the bank, and acquiring a loan can be a process that takes several months. Banks however will not offer on-the-spot financing to a business that is purchasing merchandise in the same way that they would offer on-the-spot financing to a consumer purchasing a car. As a result, it is up to the B2B company to offer the financing solutions that their customers need themselves. This leads to our next problem, how to B2B companies pay for the products they sell in the first place.
Businesses that operate B2B of course have expenses themselves that need to be covered. If they are a manufacturer, they will need to purchase raw materials from suppliers that are also B2B businesses. If they are importers, they will need to purchase product from a factory overseas, another B2B business. While a domestic supplier of raw materials may be willing to give credit to their customers, and overseas supplier or factory absolutely will not extend credit to their customers, and will instead typically require payment prior to shipping the product. It is not uncommon for Chinese factories to require anywhere between a 30% - 50% deposit just to start production for an order, and then require the balance to be paid prior to the product being placed on a ship. This means that importer will typically need to pay their factory 60-90 days before they receive their product, and then wait at least an additional 30 days before their customer pays them for it.
While larger B2B businesses may be able to qualify for bank loans and lines of credit, and some may even have enough available funds to finance these transactions on their own, for most small and medium sized enterprises (SMEs) this can be a huge problem. Fortunately, there are solutions available that offer financing to B2B businesses. With purchase order financing, SMEs can get a short-term loan to cover the cost of paying their suppliers, and with accounts receivable factoring, they can cover the time period between when they ship to their customers and their customer sends payment. Best of all, both of these solutions can work together to give them a single seamless solution to their financing needs.
When a B2B business receives a large purchase order from a customer, they can then use that purchase order as collateral in order to receive a short-term loan so that they can pay their suppliers to produce the order. This loan gets paid off with the proceeds of the resulting sale, so small businesses may qualify for much larger loans than they would normally, giving them the fund necessary to pay their suppliers for the order. As a result, SMEs don’t have to shy away from larger orders and can grow their business at a quicker rate than they would be able to relying on their own funds.
Accounts receivable factoring, often simply referred to as factoring, is the act of selling your accounts receivable to another party, a factor, at a discount. So instead of waiting 30 days or longer to get paid by a customer, a B2B business may factor their receivables and get funding the same day they ship merchandise to their customer. Since they are selling their receivables, they are not just getting funded earlier, but they are also passing along all the risk associated with offering credit to their customer to their factor. The factor becomes responsible for collecting from the customer, and in the case of non-recourse factoring, fully insures the receivables against non-payment.
Typically, in the world of finance, only one financing solution can ever be utilized by a company. The reason behind this is because each financing solution requires collateral, and most of the time a lender will place a blanket lien over all of the borrower’s assets. As a result, other lenders are then unable to work with the borrower. However, many factoring companies offer purchase order financing in addition to accounts receivable factoring, giving their clients the ability to utilize both financing tools.
In this situation, a business will present a PO to their factor and tell them how much they would like to borrow. The factor then loans them the requested amount so that they can have the order produced. Once produced and received, the business will ship and invoice their customer and then factor the resulting receivable. The factor will apply a portion of the proceeds towards the PO loan, and will send the balance to the business.
Of course, there is a cost associated with both purchase order financing and accounts receivable factoring, but that is true of any type of financing. In order to save money, most businesses will factor most or all of their invoices and only use purchase order financing when absolutely necessary. Typically, the proceeds from factoring provide B2B businesses with the cash flow that they need in order to keep their business running smoothly. Purchase order financing is really only necessary for exceptionally large orders, or to get a seasonal business through their busy season. Factoring is available on any size orders and is also a debt free form of financing.
If you are looking for Purchase Order Financing and Accounts Receivable Factoring to help fund your business, look no further than DSA Factors. We are a family owned and operated business that has been factoring for 35 years. As a small business ourselves, we understand the difficulties that many small businesses face and are always available to speak with our clients and come up with solutions to funding their business. Give us a call today and 773-248-9000, email us at email@example.com, or chat with us here on our website and secure your business’s financial future. At DSA Factors we have money to make your company grow!
Having time to pay for an order is important for any business in managing their cash flow. Forcing a customer to pay for a product up front is a great way to kill a potential sale and what could amount to a long term relationship. Therefore, it is in the best interest of any wholesaler to allow their customers time to pay for their orders. There are two ways of doing this, net payment terms and credit cards. However, while both of these methods offer your customers time to pay, there are major differences between the two methods. Let’s compare some of the various features of these two payment options from both the customer’s and the vendor’s perspective.
From a customer’s perspective, being offered net payment terms is very beneficial. It gives them more time and better flexibility in paying for their orders. They don’t need to worry about what happens if they make a payment late. They aren’t constrained as much by credit limits, making it much easier to place large orders. Plus, they are able to develop a good working relationship with their vendors that is mutually beneficial.
Both net payment terms and credit cards offer your customers time to pay for their merchandise, although not necessarily the same amount of time. Net payment terms are typically 30 days, although it is not uncommon to see terms that are 45, 60, or 90 days. Net payment terms can also be broken up in installments, for example, 30-60-90 day terms allow the customer to pay a third in 30 days, another third in 60 days, and the final third in 90 days.
Credit cards are of course based on billing cycles. Normally credit cards offer two weeks to make a payment after the end of a month-long billing cycle. So depending on when an order is shipped and the customer’s billing cycle, the customer may have anywhere between 15 and 45 days to pay for the merchandise.
It is not unusual that a customer will pay a bill late, and this is probably one of the biggest differences between net payment terms and credit cards. With net payment terms, it is normal for a bill to get paid late, oftentimes a customer may wait a week or two before mailing a check, and then you still need for the post office to deliver that check. This is just business as usual, and normally you would offer your customers a generous grace period to make payment before charging them interest.
With a credit card, the bill is due and must be paid by the date on the bill. That means if you are mailing a check, you need to mail it a week early to ensure it arrives on time. Of course it is much more common these days for credit cards to get paid through a bank’s online bill pay system, but still this needs to get done one or two business days before the bill is due so that it doesn’t get paid late. If a credit card bill is paid even one day late, the credit card company will charge late fees and interest. As a result, companies that pay for orders with a credit card may place smaller orders to ensure that they have enough funds to pay their credit card bill when it becomes due.
Certainly a customer needs to be credit worthy in order to get net payment terms or a credit card, and how credit worthy they are will determine what type of credit limit they will receive. With net payment terms, a credit limit will be determined by their payment history either with the vendor or on credit reports. This means that in order to get a higher credit limit, the customer needs to request net payment terms from many o their vendors in order to establish a good payment history. It is up to the vendor to determine what type of credit limit to give a customer, and that credit limit has no impact on credit limits imposed by other vendors.
Credit card companies have their own way of determining credit limits, but again they are based on payment history. The difference with a credit card is that the credit card’s limit applies across everything that they put on the credit card. If a customer places orders with three other vendors on their credit card, and then places a credit card order with you, it is possible that they may have already exhausted their credit limit and won’t be able to pay for your order until they pay down their credit card bill.
When a customer is given net payment terms they are establishing a relationship with a vendor. They have been assigned a credit limit and will have the ability to have that credit limit increased as they do more business. As a result, the customer is motivated to maintain their relationship, which leads to more and larger reorders.
With a credit card, the customer has no payment relationship with their vendors and how they pay their credit card bill has no bearing on the customer-vendor relationship. A customer may therefore be tempted to go with a new vendor who is offering better pricing as it will have no impact on their ability to place larger orders in the future.
From a customer’s point of view it is easy to see that it is more beneficial to be given net payment terms. It is not unusual for customers to place larger orders when given net payment terms, and to stay loyal to their vendors who offer them net payment terms. In this way, net payment terms benefit both the customer and the vendor.
From a vendor’s point of view, the decision between offering net payment terms or taking a credit card isn’t so clear cut. There are many benefits that a vendor may see in taking a credit card, with the major downside being credit card processing fees. However, with accounts receivable factoring, a vendor can receive all the benefits that credit cards offer at a comparable price tag.
A vendor’s cash flow is perhaps what is impacted most by the decision to take net payment terms or a credit card. When taking a credit card, the vendor receives the proceeds of the sale immediately after shipping the merchandise, which allows them to maintain healthy cash flow.
With net payment terms, a vendor will not get paid for 30 days or more, which can place major strains on a vendor’s cash flow. However, with accounts receivable factoring, the factoring company will fund the vendor the same day that they ship the merchandise to their customer. In this case they are getting paid just as quickly as they would had they taken a credit card and allows them to maintain the same healthy cash flow.
When taking a credit card there is no need to do any credit checking or establish a credit limit. All you need to do is swipe the card or key in the numbers. Your terminal will tell you if a credit card is declined because it is over their credit limit.
With net payment terms you are responsible for performing credit checks on a customer and establishing a credit limit. Failing to do so could potentially get you in trouble. However, with factoring, it is your factor’s responsibility to perform the credit checks and establish credit limits. Your factor will also establish a credit limit for how much you can sell to your customer, so there is no need to do worry about what will happen if a customer’s credit card is maxed out.
With a credit card payment you simply place a charge on the card and have nothing more to worry about. It is not your responsibility to make sure that your customer pays their credit card bill.
With net payment terms, it isn’t so simple. While some customers will mail a check when an invoice becomes due, most customers will need some reminding. This means you will need to have someone managing collections and either sending out account statements or calling customers whose invoices have become due. Of course, with factoring this will become your factors responsibility. Factors employ professional collectors who will handle all of this work. Furthermore, factoring companies tend to be able to get paid quicker than vendors would on their own, and faster payments means faster reorders.
Clearly when getting paid via credit card, the credit card company is assuming all of the risk in the transaction. It doesn’t matter to the vendor if their customer is unable to pay their credit card bill because they already got their money.
When offering net payment terms, the vendor is assuming all of the risk in the transaction. If a customer is unable to pay, then the vendor is out the money. However, with non-recourse factoring, the factoring company is insuring the vendor’s receivables. This means that if a customer is unable to pay, it is the factoring company who is out the money.
When taking a credit card, the main drawback is the credit card processing fees. You will be giving up several percent to the credit card company.
With net payment terms, there is no expense. Your customer will mail you a check when payment is due, and you will be able to deposit the full amount into your bank. Of course, if you use accounts receivable factoring, there will be a fee and it will be very comparable to the credit card processing fee you would have paid had you taken a credit card.
From a vendor’s point of view it is easy to see why a credit card may be preferred over net payment terms. However, with accounts receivable factoring there really is no difference between net payment terms and credit cards. As a result, there is no reason to shy away from offering net payment terms when they can easily be factored.
Ultimately, when making a sale, it is best to have every tool at your disposal and to give the customer what they want. If a customer wants to pay with a credit card, then take a credit card. If a customer wants net payment terms, then offer them net payment terms, you can always factor it to avoid the drawbacks of net payment terms. The most important thing is just to make your customers happy so that they will be coming back to you for many years to come.
If you’ve never offered net payment terms and don’t want to deal with slower cash flow or the burden of managing receivables, give DSA Factors a call today at 773-248-9000, email us at firstname.lastname@example.org, or chat with us right hare on this website. We have been offering accounts receivable factoring for 35 years, and have the ability to make offering net payment terms as simple as swiping a credit card.
Quite simply, accounts receivable is money owed to your business by a customer (a debtor) who purchased either goods or services on credit and will be paid in the short term. While accounts receivable are listed as an asset as far as accounting goes, a business does not have access to these funds until they collect on them. As a result, a company that has most of its assets in receivables, does not have access to very much working capital and may suffer from poor cash flow.
Most commonly, a receivable is money owed by a customer in exchange for goods or services performed. A receivable is represented by an invoice that becomes payable at the end of the agreed upon terms. Usually the terms of an invoice are for 30 days, but it is not uncommon to see terms that are 45 days, 60 days, 90 days, or longer. It is also possible that the terms may allow for payments to be made in installments. A subscription is also another form of a receivable.
Accounts payable is the opposite of accounts receivable, it is money that you owe to another company. Therefore, your account receivable are your customer’s accounts payable. Where accounts receivable is considered an asset, accounts payable is considered a liability.
In order to convert accounts receivable into cash, you will have to collect on the receivables. Alternatively, there are ways to receive funding based on receivables. Since receivables are an asset, banks are willing to consider them as collateral when giving a loan, but will typically value them at only 70-80% of their actual value. However, you will still need to collect on your receivables in order to pay off the bank loan. Another alternative is accounts receivable factoring, where you sell your receivables to another business (a factor) at a discount. In this scenario, since your factor is purchasing your receivables, you are no longer responsible for collecting on them, and unlike a bank loan, there is nothing to pay back. Your factoring company will also fund you the same day you invoice your customer, greatly improving your cash flow.
It is quite possible that a customer will not pay you on a receivable. This could be due to a customer filing for bankruptcy or going out of business, in which case there is little you can do to collect on the receivable. If a customer is simply a deadbeat who isn’t paying their bills, you could hand over your receivable to a collection agency. Collection agencies work on contingency and in general take between 25%-33% of what they collect as a fee. In the event that you are unable to collect, or have to give a portion of your receivable to a collection agency, then you will have to write this off as bad debt.
The most important thing you can do to avoid writing off bad debt is to check out your customer’s credit prior to offering them payment terms. If a company has poor or no credit, you may ask them to pay upfront for goods or services. There are two main ways to credit check a company. First, you can subscribe to a credit agency and pull reports on companies. This is the best source of credit data available, but depending on which agency you use, they may or may not have data on your customers and you will either need to subscribe to their service on an annual basis or pay for each report, regardless of the quality of the reports they provide. The other option is to ask your customers for credit references and then ask their references to provide you information. It is important to note that when doing this, a bank is not a valid reference, you will want to focus on trade references from companies that are similar to your own. However, these references are not required to provide you with any data, and oftentimes will not respond to credit reference requests. Should you receive a response, you also need to be sure that the credit reference is a valid one, some dishonest businesses will provide reference sheets with contact information for family and friends who will provide them fake references.
The other option is credit insurance, which can be obtained in two different ways. The first option is credit insurance companies. Just like any other insurance product, you pay a premium for credit insurance and there will be deductibles, minimums, and maximums. In general, if you do more volume, and have higher quality customers, then insurance companies will offer you a better rate on your premiums. For companies who do under a million in sales annually, getting credit insurance can be very expensive, and oftentimes due to deductibles and minimums won’t cover any of your losses. Insurance companies will handle credit checking for you, but typically only on larger accounts, for smaller accounts that won’t meet deductibles they will not provide any credit checking. As a result, you will still have to perform credit checks on smaller customers. The other way to get credit insurance is through a factor that offers non-recourse factoring. Factoring companies do not charge premiums, and do not have deductibles, minimums, or maximums, instead the insurance is included as part of the factoring. Factoring companies will provide credit checking on all of your accounts, regardless of size, so you will no longer be responsible for credit checking.
There are many reasons to offer credit terms to your customers. First and foremost is that your customer may require it. If you wish to sell to a large company who is requesting 90 days to pay, your option is either to agree to their terms or forgo the sale. With smaller customers, they may not require credit terms, however they will be much more likely to place larger orders if credit terms are offered to them. Getting credit terms will allow them to collect on their receivables before their payables become due, so by getting terms they will have access to more funds at the time that their payables become due. Offering terms can also lead to quicker reorders as your customers won’t need to worry about having the funds available when they want to place a reorder. Finally, if you don’t offer credit terms, then your customer may find a competitor who does and place their order with them instead. Therefore, offering credit terms is a very important sales tool, even if it means you will be holding onto receivables instead of cash.
Managing your receivables can be difficult, especially for new or growing businesses. At DSA Factors we have been providing accounts receivable factoring for 35 years. Let us manage your accounts receivable by performing your credit checking and collection work for you. In addition to that, we will fund you the same day you invoice, providing you with much improved cash flow, and will fully insure your receivables with our non-recourse factoring. Give us a call today at 773-248-9000, email us at email@example.com, or chat with us right here on our website.
Accounts receivable factoring has been around for centuries, but in no way does that mean that it is an antiquated from of financing. Of course, a lot has changed since the days when invoices were etched in stone, and factoring companies have evolved as well. The reason why factoring has been around for so long and still remains a popular form of financing is because it has always been one of the best and most accessible options to growing businesses. Why should you consider accounts receivable factoring? Below are just 21 of the benefits of using accounts receivable factoring to grow your business.
The primary benefit of factoring is getting funded for your receivables the same day you invoice your customer, rather than having to wait 30 days or longer to get paid. Having healthy cash flow is crucial for any business, and it was what factoring is all about.
Accounts receivable factoring is a completely debt free form of financing. Rather than giving you a loan with receivables used as collateral, your factoring company is actually purchasing your receivables. You don’t need to worry about having to pay your factoring company back.
Speed and consistency is what factoring is all about. Typically factoring companies will fund you the very same day that you send invoices over to them. In many cases, with a simple email or call, they may even be willing to extend their deadlines for you if you need a little bit of extra time to get everything put together, or are waiting for a truck to arrive.
Unlike banks that can take months to make a credit decision, factoring companies move quickly. It is quite possible to get setup with a factoring company within 24 hours and receive your first funding within 48 hours. Factoring companies also make speedy credit decisions on your customers, oftentimes approving orders in 30 minutes or less. In many cases, you might even get an instant approval on your factoring company’s web portal.
There is no need to worry about whether or not you will be approved for factoring. Your factor is extending credit to your customers, not to you. As a result, credit decisions are based on your customers’ ability to pay, not your own.
Orders that may have been too large to take on in the past, are easily manageable with factoring. You don’t need to worry about having all of your money tied up in receivables, and you don’t need to worry about what would happen if your customer is unable to pay on time or at all.
Some factoring companies also offer purchase order financing. This means that they will give you a loan to pay your suppliers in the event that you receive a large purchase order. This is a great tool for any business that is getting into a major retailer for the first time, is simply expanding, or for businesses that are seasonal.
Your factor will handle all of the credit checking for you. That means you no longer need to ask new customers for credit references, or subscribe to expensive credit reporting agencies. You also don’t need to continually monitor your existing customers, as this is all handled by your factoring company.
By factoring your receivables, you are also outsourcing your collections to professional and courteous collectors. You no longer need to have employees dedicated to collecting, or take away time from important tasks to make collection calls. Instead, when you call customers, your focus can be on making sales.
Your factoring company works with many other clients in your industry who sell to the same accounts as you. If an account does not pay a factor, it not only holds up their ability to receive more merchandise from you, but also from several other of their vendors. It is also known that factoring companies report both prompt payments and delinquencies to credit agencies, so how they pay a factor has a very large impact on their credit.
If your factoring company offers non-recourse factoring, your receivables are fully insured against non-payment. You no longer need to worry about a customer who is unable to pay for merchandise. Furthermore, you don’t need to worry about paying annual premiums, deductibles, and reaching minimums, every invoice you factor is fully insured.
While factoring does not directly impact your business’s credit, the improved cash flow it offers you allows you to take care of bills faster, and this of course is directly reflected on your credit report.
There is no limit to how much you can factor, factoring is the only form of financing that grows as your business grows. Where bank look at what you did in the past, factoring companies look at what you are doing now, and what you can do in the future. The more sales you have, the more funding that is available to you. Factoring companies are also happy to work with seasonal businesses that experience most of the sales volume in a short two to three month period.
Some factoring companies are very flexible in how they finance your business. They may allow you to choose which accounts you wish to factor to help you minimize how much you need to pay in factoring fees.
Unlike a line of credit from a bank that comes with fees whether or not you draw on it, you only ever pay a factoring fee when you factor an invoice. If you wish to keep an account in house, or have a customer who prefers to pay with a credit card, then you are not charged any factoring fees on them.
With factoring you are simply being paid for your receivables, unlike a bank who may providing you with a loan for a certain purpose and requesting financial statements. As a result, with factoring the funds you receive are yours and they can be used in any way you wish.
Most factoring companies offer online portals that offer a variety of real-time reports. These reports can be used to assist in sales or accounting. Factoring companies are also willing to put together additional reports that you may need from time to time, usually at no additional charge.
Regardless of how much business you do, factoring will always fit your business. From companies that only do $50,000 a year to companies that do $5,000,000 a year or more, factoring will provide you with the financing you need. Likewise, no order is too small or too big, whether you are selling $100 to a mom and pop store, or $1,000,000 to a national retailer, you can always factor the resulting receivable.
While most financing options aren’t available to startups or younger, growing companies, factoring is available. Even if your company has been around for less than a year and hasn’t established any credit yet, you still can qualify for factoring.
Factoring is all about relationships. Your factoring company will always take the time to speak with you and work with you to help you grow your business. Some factoring companies are even family-owned small businesses themselves, so they understand many of the struggles that you need to deal with, and you will work directly with the principals.
Your factoring company’s success is directly related to your success. Since a factoring company only gets paid when you factor an invoice, your business’s success is at the heart of every decision a factoring company makes.
If accounts receivable factoring sounds like it may be the financing option your business is looking for, give DSA Factors a call today at 773-248-9000 or email us at firstname.lastname@example.org. We are a family owned business that has been providing accounts receivable factoring and purchase order financing for over 35 years. So what are you waiting for, give us a call today and start growing your business tomorrow!
Everyone is familiar with credit scores and credit reports. How good your credit score is determines whether or not you will qualify for a mortgage, a car loan, or even a credit card. This of course makes sense, as banks don’t want to give away money to people who will be unable to pay them back. However, in the same way that we have personal credit that determines our ability to make purchases, businesses also have credit that can be used to determine their ability to pay for merchandise and services. Unfortunately, business credit isn’t as clear cut as personal credit. For one, there is no universally used credit score out of 850 like there is for individuals. There also aren’t three major credit bureaus that serve up the same data, but a large number of credit reporting agencies that all specialize in different fields and provide different types of reports with different data points. Finding the right credit agency or credit agencies to meet your needs not only is a difficult task, but can become prohibitively expensive. However, not offering businesses credit when they request it can result in lost sales.
Before we dive any deeper into credit reports, it is important to understand the difference between secured and unsecured debt. As the names imply, secured debt comes with some security in case something goes wrong. Unsecured debt comes without any security, meaning that should something go wrong, it is unlikely that it will get paid back.
With personal credit, reports include mortgages, car loans, credit cards, student loans, and unpaid bills such as medical bills and maybe even rent. All of these factors contribute to a consumer’s overall credit and their overall ability to pay back debt. Banks and other financial institutions are willing to lend this money because more often than not, collateral is tied to any money they are borrowing. With a mortgage, the bank is holding the home as collateral, while the bank is holding a car as collateral in the case of a car loan. Then you have student loans which can not get wiped out by bankruptcy. In the case of rent, not paying rent can lead to eviction. That leaves pretty much just credit cards as the only type of consumer debt that isn’t secured, and this is the reason why credit cards carry APR’s that are 5-10 times higher than that of a mortgage or a car loan.
In the world of business, secured and un-secured debt is more strictly defined. Debt is secured if there is a UCC-1 filing against a business which places a lien against certain or all assets, but that business must agree to this and there will be wording in their contract with the bank in regards to this. This of course is a requirement of getting a bank loan or line of credit, so any credit given by a bank is secured. When it comes to utility bills, this debt isn’t secured, but the utility has the option to stop servicing the business if they don’t pay, which would most likely put them out of business. For vendors who offer payment terms to a business, whether they sell merchandise or a service, the debt is unsecured. They are simply relying on the honesty and financial well-being of a business in order to get paid. The danger here is that in the event of a bankruptcy, any funds made available through liquidation must first go to secured debtors, before anything goes to unsecured debtors. Typically, in a scenario like this, there is very little, if any, money left that can go to unsecured debtors, and they are fortunate if they receive pennies on the dollar in this sort of event.
For a bank that is offering secured debt, they are going to look at a company’s financial statements to determine how much they can safely lend to a customer. Typically, banks will set conservative credit limits as they will want to make sure that they come out whole in the event that a business needs to be liquidated. However, if you are selling to a business on payment terms, most likely you will not have access to their financials, and even if you did, you wouldn’t have the time it takes to thoroughly analyze them every time you make a sale. Banks can take months to make a decision, but if a vendor takes that long to make a decision, then a business will simply find a different vendor to purchase from.
So as a vendor, you do not want to consider secured debt such as bank loans or even utility bills when making a decision, but rather you want to focus on trade payments. Trade payments are how businesses pay their vendors for the merchandise and services that they received. They would include moneys owed to manufacturers, distributors, freight companies, advertising agencies, and anyone else who sells to the business. Of course, the most valuable data would come from sources in the same industry as you. So, if you are a furniture manufacturer, you would be much more interested in how a business pays other furniture manufacturers than in how they pay trucking companies.
Selecting a credit agency to obtain a personal credit report from really just comes down to whichever one is cheaper. The reason for this is that all the credit card companies, banks, and other financial institutions report to all three of the major consumer credit agencies, so there it is unlikely that there would be any differences between any of their reports. However, in the business world this is not the case. While every credit reporting agency is willing to collect data on every business out there, there is no credit agency out there who has data on everyone. The reason for this is that credit reporting agencies collect their data from their customers and may supplement that with data they purchase from third parties (data which is collected from the third parties’ customers), and therefore only have data on the businesses who do business with their customers. A credit agency that is extremely popular with freight carriers would be an excellent choice to work with if you drive a truck, but not a very good choice if you are a clothing designer. While word of mouth from others in your industry may be a good way to select a credit agency, you will find that oftentimes selecting the right company comes down to trial and error. It is important to note that there is no credit agency that will have data on everyone of your customers or potential customers, so you may want to work with more than one credit agency.
Another thing to consider besides who is reporting data to an agency and the businesses that they have data on, is the quality of the data in the reports. Does the report only show what is currently outstanding, or does it provide you with a month-by-month breakdown of what was outstanding for the last 12 or 24 months. With small businesses, it is quite possible that they only have one vendor who reports to a credit agency, and they may only purchase from them once or twice a year. In this situation, a credit agency that only shows what is currently outstanding will most likely provide you with a blank report. A month-by-month report is also important for understanding how quickly a business pays. Just because they have receivables that are current this month, doesn’t mean that they will pay them on time, it simply means that they were billed less than 30 days ago. A month-by-month breakdown allows you to see payment trends and how long it takes a business to pay their bills.
Besides breaking down payments month-by-month, another way credit agencies can break down the data is by industry or even debtor. Simply giving you a total of what is outstanding on a monthly basis doesn’t really give you any idea of who that money is owed to. If that money is owed to a bank then it isn’t a trade payment and so long as the business is paying monthly installments, they are current on the entire loan. You need to understand how a business is paying other vendors in your industry, and you need to get an idea of how much credit each vendor is extending them so that you know how much credit you can extend to them.
Finally, like all things in the world of business, price is going to be a major determining factor in which credit agency you decide to work with. Subscribing to credit agencies and pulling reports isn’t cheap, and may not even be worth it for smaller orders as it can easily blow your profit margins. Some credit agencies offer pay as you go options, while others offer packages of so many reports per year. Of course, the more reports you buy, the better the rates become and the more negotiating power you will have. Some agencies may also require that you share your data with them, while others may offer you a better price if you share your data. However, just like anything else, you get what you pay for. A credit agency that offers lower prices, probably has lower quality data and reports than a company that charges more. While some of the more well-known companies may simply charge higher prices based on their name and reputation, but may not actually provide you with better reports.
Requesting credit references is another popular way to go, but isn’t fool proof. First of all, you are relying on other businesses, whom you have no relation with, to provide you with these references. These businesses are not required to give references, and, some even have policies that they do not provide credit references. Normally when you send out three reference requests, you would be lucky to get one response within a week.
It is also important to realize that a potential customer will only provide you with references that they know will come back looking good. If they didn’t pay someone, they aren’t going to provide them as a reference, but will instead only include the companies that they paid well. This can be a big problem with selective payors. Selective payors will pay their main vendors promptly all the time, but will pay less important vendors poorly, and while this will show on a credit report, it won’t show if they only give you credit references.
The other problem with credit references is that you need to check out the references as well. Unfortunately, there are some dishonest businesses out there who will provide references that are either friends or family, and they may even use a real company’s name, but provide you with their brother’s cell phone number or email address. So anytime you get credit references, it is important that you investigate them to make sure that they are legitimate.
As a result, while credit references may be acceptable for small orders, it would be irresponsible to grant a business a large credit line based only on credit references. Credit references are best to be used when the credit agencies don’t have any data, or don’t have enough data on a business that has placed an order with you.
Credit checking can be a very expensive and time-consuming process, but luckily there are alternatives to performing the credit checks yourself. By working with an accounts receivable factoring company, they will handle all of the credit checking for you. Accounts receivable factoring companies work with many different vendors so as a result they are pulling lots of credit reports and providing lots of data to the credit agencies. This allows them to not only negotiate better pricing with the credit agencies, but they can afford to work with a handful of agencies providing them access to more and better data. If they have multiple clients selling to the same business, then they only need to pull a single report, which also helps in reducing costs. Factoring companies also have their own data that they can rely on which further reduces their costs, and oftentimes are already familiar with many of your customers. Most factoring companies don’t charge their clients for credit checking, it is simply included as part of their overall service.
Factoring companies also offer another advantage, and that is motivation to pay quickly. If a business doesn’t plan on ordering from you again for another year, they will have very little motivation to pay you promptly. Since many small vendors don’t report their data to credit agencies, they will also have no repercussions for paying you back slowly. However, if you put your receivables through a factoring company, not paying for your product in a timely fashion can result in orders from other vendors getting held up or their credit line with them getting slashed. Factoring companies also report their data to numerous credit agencies, meaning that failing to pay a factoring company could impact their ability to purchase from vendors who don’t even use that factoring company. As a result, most businesses show a lot of respect towards factoring companies, and tend to pay them better than they pay vendors who do not use factoring companies.
Accounts receivable factoring is a simple process in which you sell your receivables to a factoring company. Upon receiving an order, you submit it to your factoring company for credit approval. It is at this time that you factoring company will perform all the necessary credit checking. Typically, your factoring company will get back to you with an answer within an hour. Once approval is given you can go ahead and either ship the merchandise and or provide your service to your customer. You will then invoice your customer as usual and send a copy of the invoice to your factoring company. At that time, your factoring will then fund you for the receivable, meaning not only did they perform the credit checking for you, but they are also speeding up your cash flow by 30 days or more. After that, your factoring company will handle all of the collection work for you, meaning that you no longer need to follow up with customers in order to get paid. Furthermore, if your factoring company offers non-recourse factoring, then it means that your receivables are fully insured against non-payment.
Of course, there is a cost to factoring, but the fee for factoring a receivable is very similar to a credit card processing fee. However, you will save money as there is no longer a need to subscribe to expensive credit agencies and you no longer need to have employees spending time following up with customers when invoices become due. So, offering net 30 day payment terms costs no more than accepting a credit card for payment, you get paid just as quickly, and in the case of non-recourse factoring, also eliminates the risk.
Getting started factoring is easy, and can be done in as little as 24-48 hours. If you would like to learn more about how factoring works and get set up factoring, please give DSA Factors a call today at 773-248-9000 or email us at email@example.com. DSA Factors is a family-owned business that has been factoring for over 30 years, and has the ability to meet all your credit checking and funding needs.
For any business owner, there is nothing worse than when you sell a product to your customer and then they don't pay you for it. Unfortunately, this is something that happens to everyone, even if you perform your due diligence prior to offering net payment terms to your customer. The solution to this problem is of course to acquire credit insurance, so that you are covered in these situations. However, just like health, home, and auto insurance, credit insurance also has premiums, deductibles, minimums, maximums, and other rules that you need to abide by. This article will examine many of these different aspects and help you understand if credit insurance is really worth it for your business, or if there may be a better option.
It goes without saying that you are going to have to pay a premium to get credit insurance. How much that premium is depends on your coverage, diversification, and quality of your customers. One thing to keep in mind is that as your coverage increases so does your premiums, although not at the same rate. Basically, as your coverage increases, your premium increases with it, but the premium as a percent of total coverage decreases. Like anything else, you get a better deal when you buy in bulk.
However, while premiums might appear to be your main expense, they certainly aren't your only expense, and may not even be your largest expense. Most likely your credit insurance company will charge you a fee for each account you want them to cover and set a credit limit for. As a result, if you sell to lots of different accounts, while your premium may be lowered because you are highly diversified, paying $50 to get each account approved could potentially cost you even more than your premiums do each and every year.
Another cost to consider is your deductible. While you aren't going to pay your deductible, if you have a $10,000 deductible, then you need to sustain the first $10,000 in losses each year. So if your losses are $0 for a the year, then of course it doesn't matter what your deductible is, but at the same time you paid a bunch of money for insurance you didn't need. However, if you do sustain losses, you are then responsible for the first $10,000 of them, and this is an additional expense.
After that, you have to look at co-insurance. Oftentimes co-insurance is 10%, meaning that the insurance company will only fund you 90% of the claim amount. So assuming you have met you deductible and you now have a claim for $50,000, your insurance company will only fund you $45,000, you are responsible for 10% or $5000, which is just one more expense you need to factor into the overall cost.
Finally, while it may not be a cost, there is also the time that it takes to get paid on a claim by the credit insurance company. First, you need to follow all of their rules, failure to do so will result in forfeiture of your coverage. However, assuming you can follow the rules, most likely you will not be able to file a claim until an invoice becomes 120 days past due. Then once you file, your credit insurance may not fund you for 90 days as they try to collect. If successful in collecting, then they will penalize you and maybe only give you 50% of what they collect, so you better be pretty confident that they will not be able to collect. However, if they can't collect, when you add up the terms of the invoice, waiting until the invoice is past due, and then waiting to get paid on the claim, it can take you 8 months or more to actually receive your money. If it is a large claim, waiting 8 months to get paid can severely strain your cash flow and require you to borrow funds temporarily, adding further expense.
When you purchase credit insurance, you are purchasing a particular amount of coverage which should be equal to your annual sales volume of insurable accounts. Because you don't know how much your volume will be in the coming year, you have to do your best to guess. If you underestimate your coverage, you will have to buy additional coverage later and won't receive the benefit of a lower premium rate for purchasing a larger coverage amount. However, if you overestimate, you will wind up paying for coverage that you don't need.
Of course, just because you pay for a certain amount of coverage, doesn't necessarily mean that all of your accounts will be covered. Each account you want covered has to be approved and assigned a credit limit. If you have borderline accounts, they may not be given a high enough credit limit, or even worse, not approved at all. In this situation, if you still choose to sell to them, you are responsible for any amount above the credit limit, or for the entire amount in the case that they don't get approved at all.
Aside from coverage limits and deductibles, which are applied across multiple accounts, minimums affect each individual account. Most likely your insurance company has a minimum claim amount. If this minimum is $5000, and you have a customer who didn't pay you $4000, then you can not claim it and it doesn't even count towards your deductible. In other words, this means that credit insurance does not cover your smaller accounts so you will want to eliminate these accounts from your coverage. Of course, with any insurance company, you can lower or even eliminate these minimums, but that of course is going to result in much higher premiums.
Then you have an overall policy maximum for the year. If the maximum for the year is $100,000, then if you even if you sustain losses of $150,000 and all the accounts are within their credit limits, your still will only receive $100,000. Plus any other losses you have for the rest of the policy year also won't be covered.
By working with an insurance company, you may be able to reduce some of your expenses in performing due diligence on your customers since your insurance company is doing this for you. If the insurance company is providing one of your customers with a credit limit of $10,000, then there is no need for you to pull credit reports on that customer, so long as their orders don't exceed $10,000. Of course, if you have a minimum of $2500, and a customer places an order for $2000, you are still going to need to pull a credit report on that customer since the insurance company won't cover them. So while you will still need to subscribe to a credit reporting agency, you won't be pulling as many reports which should reduce the amount of your subscription. Of course, it is important to keep in mind that you will be paying the insurance company a fee to provide a credit limit, and that fee is most likely a lot more than what a credit rating agency charges you for pulling a report.
Like any other type of insurance, the insurance company is not in the business of losing money. So in a good year, you won't sustain any losses, or those losses won't meet your deductible, and you wind up paying for something that you didn't need. In a normal year, you may sustain losses that are more than your deductible, but they won't be more than the premiums that paid that year. It is only in a really bad year, one in which you have several major losses, that it pays off to have credit insurance. Of course, having credit insurance in years like that might make the difference between staying in business and going out of business. It is also important to figure out how much you will save by pulling fewer credit reports as that will help offset the price of insurance.
It is also important to consider if credit insurance is right for your business. For a very small business, it is probably counterproductive. The premiums, cost of assigning credit limits, and deductibles might add up to 20-30% of your annual volume, and certainly if this is the case then it does not make sense to get credit insurance. Credit insurance is most beneficial to very large corporations as their premiums are at a lower percentage of their annual volume, and they have more negotiating power when it comes to credit limit fees, deductibles, and minimums. Credit insurance could also be valuable to companies whose customer base is located primarily overseas. But regardless of your company's size and where their customers are located, a credit insurance company is not in the business of losing money. While in a particularly bad year you might come out ahead of the game if you have credit insurance, over the course of a decade there is very little doubt that you will have spent more on credit insurance than you would have lost without it. The real benefit of credit insurance is that it allows you to spread out the cost of a major loss over a longer period of time, making budgeting easier.
There is an alternative to credit insurance, and that is non-recourse factoring. With non-recourse factoring you are selling your receivables to a factoring company so it is their responsibility to collect from your customers, and they are on the hook if a customer does not pay. If you choose the right factoring company to work with, you won't have to worry about premiums, deductibles, co-insurance, credit limit fees, minimums, or maximums. With non-recourse factoring your receivables are fully insured.
With non-recourse factoring you also don't have to worry about rules established by credit insurance companies. Credit insurance companies require that you contact them at certain points throughout the collection process to make them aware of what is going on. Should you fail to do this, then your receivables are no longer covered by the insurance company. They also require you to file within a certain period of time, usually within 120 days of an invoice becoming due. Once this time period has passed, you are no longer covered.
Non-recourse factoring also carries additional benefits. Because there are no minimums, there is no need for you to subscribe to a credit rating agency, your factoring company will perform all the credit checking for you. Your factoring company will also handle of your collections for you, meaning that you won't need to spend time valuable time on collections efforts. Finally, the main benefit is improved cash flow, your factoring company will fund you the same day you ship and invoice your customers. So forget about having to wait 8 months to get paid by an insurance company, your factoring company is funding you 30 days early on all of your receivables.
As for the cost of factoring, for a larger company whose annual volume is well into the millions, factoring will probably cost more than credit insurance, although the additional benefits of factoring could easily offset any additional costs. For smaller businesses, factoring is often times much cheaper than credit insurance, plus it offers them all of the additional benefits that you don't get with credit insurance alone. Whatever the size of your business, the benefit of improved cash flow is oftentimes much more important than the benefit of credit insurance.
At DSA Factors we are proud to offer our clients non-recourse factoring. Whether you are looking to insure your receivables, need improved cash flow, or simply want to outsource your accounts receivable, give us a call at 773-248-9000 and learn how factoring can help your business grow.
Many startup businesses will only take credit cards from the customers. Assuming that their customers are small, and the orders they are receiving are small, there is certainly nothing wrong with taking a credit card for payment. However, by restricting your only payment method to credit cards, and not offering net payment terms, you are also restricting the type of customers you are selling to and the size of the orders they will place with you. As your business matures, and especially once it starts to grow, offering net payment terms is crucial to the success of your business.
Net payment terms are when you offer your customers a fixed amount of time to pay you back. The most common terms offered are Net 30, or in other words, offering your customers 30 days to pay their invoices. Although terms aren't restricted to Net 30. Net 60 and Net 90 are also common, as are Net 45 and Net 75. In some industries that are seasonal terms can be even longer and sometimes rather than a number of days include a date. Terms of Net May 15 means that the invoice is due on May 15th. For larger orders, you may even want to offer a sort of payment plan to your customers, such as 30-60-90. 30-60-90 means that a third is due in 30 days, another third in 60 days, and the last third in 90 days. Finally, it is not unusual to see terms that offer a discount if an invoice is paid early. 2% 10 Net 30 means that if a customer pays within 10 days, they can take a 2% discount, otherwise the invoice is due in 30 days and they need to pay it in full at that time.
While its true that paying on a credit card gives your customers additional time to pay, the amount of time they get is dependent on when their billing cycle is. Furthermore, when a credit card becomes due, if it is not paid then your customer is immediately charged late fees and interest. If a customer is afraid that they may not be able to make a credit card payment if they give you a large order, they might reduce the size of the order so that they don't fall behind on their credit card. However, when offering net payment terms, it is generally understood that paying a bill a few days late, or waiting until it is due to place a check in the mail, is generally tolerated and your customer will not be charged interest. That said, your customers should not be paying you excessively late, if they do, you do have the right to charge them interest.
Another issue with credit cards is that they have a strict credit limit, if your customer is buying merchandise from other vendors on their credit card, that credit limit is getting divided between all of them. So, while you may be willing to give a customer a $5000 credit line, if they only have $1000 available on their credit card, they may not be able to place as large of an order as they wish.
Of course, the main benefit of net payment terms is landing those large orders from customers who will not pay you with a credit card. If you want to sell to a national retailer such as Amazon, Target, Walmart, or TJX, they are going to demand payment terms, and if you don't give them what they want then they will simply find another vendor who will. Oftentimes, these large retailers will even ask for extended terms, such as net 45, net 90, or even net 120. Part of the logic in asking for such extended terms is not because they need additional time to pay, but because they are testing you. If you are able to accommodate these longer extended terms then it shows to them that your company is financially sound and will be able do business with them for a long time to come. These companies are looking for long term relationships, the last thing they want to is dedicate shelf space to a product that they won't be able to restock.
It is up to your customer to determine what the payment terms are, they should be stated clearly on their PO (Purchase Order). If the PO states payment is via credit card, then you should not be offering that customers terms, likewise, if the PO mentions net payment terms, you should not be asking for a credit card. If a PO states the terms are Net 60, then when you invoice that customer you need to state that the terms are Net 60. Now of course you can always negotiate the terms with your customer, if you only offer Net 30 you can tell your customer that, and then the choice is theirs as to whether or not they want to accept Net 30, place a smaller order, or cancel the order altogether. It is important you know who your customer is, while a family owned business should always be negotiable, larger corporations are not always as negotiable. If you happen to sell a seasonal product, you can expect credit terms to be longer since retailers may place the orders prior to the start of the season, but won't generate any sales for several months.
Yes, there are risks with offering your customers net payment terms. While it may not be the same as a 30-year mortgage, or even a 48-month car loan, whenever you offer someone time to pay you are giving them credit and there is risk associated with it. One potential risk is that the company can declare bankruptcy. While it seems unethical for a company to place an order that they know they won't pay for, sadly is something that happens all the time, and not just with small businesses, but with major nation-wide companies as well. To make matters worse, even if you do get paid by a customer, should they file for bankruptcy within 90 days of making that payment to you, it may be considered a preferential payment and you will be required to return those funds to the bankruptcy court. Of course, a customer doesn't need to file for bankruptcy, or even go out of business, some businesses are just deadbeats and don't pay their bills.
It is common for many smaller companies to require that a new customer provide a credit card for their first order, and then are offered net 30 day terms on subsequent orders. The logic is that if they can pay on a credit card then they can easily pay you directly the next time around. However, this is flawed logic. First, you have no idea if this new account is paying their credit card in full each month, if they are making minimum monthly payments, or if they are not paying their credit card bill at all. In the same way that a business may place orders prior to a bankruptcy filing, they may also rack up their credit card bills as well. Another issue, if the customer wants net payment terms, making them place their first order with a credit card, may make them consider purchasing from a different vendor.
As a result, when offering customers net payment terms, it is very important that you do your due diligence. Typically, this requires subscribing to credit reporting agencies and paying for credit reports on your customers to make sure that they are creditworthy. Credit reports aren't cheap, and depending on which agency you pull from and how many reports you pull, they may cost $35 per report or even more. Many agencies may require an annual subscription where you prepay for a fixed number of reports, and if you don't use all the reports in the course of a year, then you lose them and are out that money. Of course, the data in these reports is usually at best one or two months old, so even if the customer looks god in the report, you are still taking risk in offering them terms, and the longer the terms are, the greater the risk is. Not to mention, no single credit agency has data on every business in the country, it is very likely that if you are using a single credit reporting agency, that they won't have data on all of your customers.
Another option for mitigating risk is to insure your receivables. Insurance, of course, is not free, and your customers need to be insurable. Simply having an insurance policy in place doesn't mean that you can offer net payment terms to anyone. Generally, your insurance company needs to approve your customers, and the order needs to be within their credit limit. Not to mention, depending on your policy you may have deductibles, minimums, and copays that you will be responsible for.
When you offer a customer net payment terms, they should be paying you either via check, ACH, or wire. Since they are already be given time to pay their bill, they should not be using a credit card, and you should not accept a credit card as you shouldn't have to pay the processing fees. Of course, just because an invoice becomes due, does not mean that your customer is going to pay it. Typically, you will need to remind them that the payment is due. This process is called collections and can be a very time consuming, and not always an enjoyable process. A good collections process usually incorporates a variety of methods, such as emails and phone calls. When an invoice becomes due these attempts to collect should just be friendly reminders, after all, these are your customers who you hope to sell to again. Although if an invoice becomes very late you may need to alter approach and in extreme situations you may need to take a less friendly approach to collections, especially if you have reached the point where you no longer want to do business with the customer ever again.
For many small businesses, waiting 30 days or longer to get paid can cripple your cash flow and hinder your ability to take on additional or larger orders. Although there are options available to companies who offer net payment terms but can't afford to wait to get paid. Getting a small business loan (SBA loan) or line of credit with a bank could give your company the funds it needs to operate while waiting to get paid. However, applying for these can take several months, and many companies who apply do not qualify. If you are approved for a loan or line of credit, in general the credit limit is based on the amount of business that you have don't in the past, if your company is growing, or has plans to grow, the credit limit will not go up, and you may find that you need to turn down orders if you don't have sufficient working capital to produce them.
However, there is an alternative to the traditional financing options offered by the banks, that is accounts receivable factoring. With accounts receivable factoring, you get funded for your receivables the same day you invoice your customers. The best part is that the cost of factoring a net 30 day invoice is no different than a credit card processing fee. So, if you can afford to take a payment with a credit card, you can also afford to offer your customer net 30 day terms.
While getting paid the same day you invoice may be the main benefit of factoring, it is far from the only benefit. First, as soon as you get an order, you will submit it to your factoring for credit approval. It is your factoring company's responsibility to check out your customer's credit and determine an appropriate credit limit. As a result, you don't have to worry about subscribing to expensive credit reporting agencies. Part of the way that factoring companies keep costs down is that they may have several clients selling to your customers, so they can split the cost of the credit reports across multiple clients. Factoring companies are also pulling a larger number of reports and receiving volume discounts from the credit agencies, and by sharing their valuable data with the credit agencies receive even greater discounts.
Factoring companies also handle all of your collections for you, meaning you don't need to take time out of your busy schedule or hire additional staff to make collection calls. Factoring companies employ professional collectors who are effective and courteous to your customers. They already have software in place for managing past due accounts. Plus, factoring companies have greater leverage in collecting, not only because they report data to credit agencies, but because if a customer does not pay one of your invoices, they are at risk of losing a handful of other vendors who also work with your factoring company.
Finally, if your factoring company offers non-recourse factoring, then your receivables are fully insured. No need to worry about minimums, deductibles, or copays. If a customer is unable to pay for an invoice, you have nothing to worry about, the funds you received from your factoring company are yours to keep. And the best part, there are no premiums to pay, insurance is included in the factoring fee.
Getting started is easy, give DSA Factors a call today at 773-248-9000 and we can answer all of your questions about factoring. If it sounds like something that you would like to do, we will send you our simple application and can be funding you in as little as 24-48 hours.
You've developed a product or service that everyone loves. You've marketed it. You've sold it. Now all you need to do is get paid for it. It seems like this should be the easiest step in running a successful business, but as many entrepreneurs quickly find out, this step is actually one of the more difficult ones. It's bad enough that your customers want you to wait 30 days to get paid, but the real problem is, most of them aren't going to pay that bill without a gentle nudge. Welcome to the world of collections.
Getting paid seems simple enough, but having A/R doesn't pay your bills and now you need to convert your receivables into cash. For most people, collections are not fun, and sometimes can be downright awkward. After all, you are asking your customers, who you hope will be long-time, repeat customers, for money. It's like lending a good friend some money, but then they never pay you back. Unfortunately, collections are something that need to be done if you want to get paid, and everybody wants to get paid!
Of course, the question is how do you go about handling collections. Collections aren't something that you can improvise a system for, you need to have a system in place for handling them as well as software for managing them. You need a reliable way of knowing who is past due at any given time, and how far past due they are. If all you do is keep a pile of invoices on your desk, you will spend all of your time just looking through each invoice every day to see if you need to contact a customer or not. You will also want a way of taking notes on the account, after all, if they told you they mailed a check yesterday, there is no need to be calling them today. Plus, there are multiple ways of contacting customers such as emails, faxes, regular mail, as well as phone calls. Of course you don't want to do all of these at the same time, but have a process in place where you do each one according to a particular schedule. In the case of email, fax, and regular mail, your customer may have a particular preference that you need to be aware of.
You also can't just use a one-size-fits-all approach, you need to take a different approach based on the situation with your customer. Is this your first time dealing with a customer, or is it the hundredth time? Is it a family business or a Fortune 500 company? Have they paid other invoices but just skipped one invoice? Was there an issue with the particular order that is causing a delay in payment? Most imprtantly, how past due are they? Certainly there is a big difference between a company that is 5 days late (and perhaps the check will be arriving in today's mail), and a company that is 45 or 60 days late. Even if some of your communications are automated, you need to have multiple options and have your software determine which one is best given the situation.
Collections is a lot of work, and without it, you aren't going to get paid. Most businesses need to hire an extra employee just to manage their accounts receivable. Although even with a dedicated employee, some companies are still going to pay slow, and if you aren't careful and performing credit checks on your customers, you're bound to find a few that won't pay at all.
Nobody ever said that running a business was easy, unless of course they've partnered with a factoring company to manage all of their A/R. When you work with a factoring company, you no longer need to worry about collections as they wil handle all of that for you. Plus, factoring companies have more leverage when it comes to collecting as they probably factor for other vendors who sell to your customer, so if they don't pay your receivbales, they run the risk of losing a handful of their vendors. Not to mention, factoring comapnies report directly to multiple credit rating agencies, meaning that by paying a factor slowly it will have a direct impact on their ability to get credit in the future. However, the best part for you may be the next time you call one of your customers, you won't need to ask them for money, but instead can ask if they would like to place another order.
Factoring however isn't just about collections, there is a lot more to it as well. Your factor will handle all of your credit checking, so you'll no longer need to subscribe to expensive credit rating agencies such as Dun & Bradstreet. Your factor also insures your receivables against non-payment, so even if they can't collect, you aren't out the money. Finally, by working with a factor, they will fund you for your receivables the same day you invoice your customer, giving your cash flow a 30 day boost!
If you want to learn more about how factoring can make your life easier, lower your expenses, and improve your cash flow, give DSA Factors a call today at 773-248-9000.