5 Ways Factoring Can Reduce Your Operating Costs

We normally think of factoring as a way to fix cash flow problems. While that's true, factoring can also reduce your operating costs. Simply having consistent cash flow on hand and reducing the overhead you need to manage your accounts receivable can significantly lower your operating costs, making your business that much more efficient and profitable. Here are five ways that you can use factoring to reduce your operating costs: 

1. Outsource or Better Manage Staff

Do you currently use subcontractors to fulfill the larger orders you get? Do you have to lay off staff sometimes when your cash flow dries up? Factoring ensures a consistent cash flow, which allows you to manage your payroll or outsource some tasks to make your business more efficient.

Consistent cash flow may also mean that you can keep more, higher quality staff on hand. Creating a better work environment will enable your employees to give you their best, which can reduce overtime payments and the high one-time costs of hiring and training.

However, it can be even more cost-efficient to outsource specific tasks, including IT, accounting, and marketing, all of which can substantially decrease your operating costs. 

2. Buy Materials in Bulk

For some industries buying in bulk can be a huge savings. Suppliers can afford to give you significant discounts when you buy up more of their product, and this can even lead to a better working relationship with the supplier over time. You become a better customer, who gets more of their time and attention.

Unfortunately, not every business has the cash on-hand to buy in bulk, even when they know they’ll use all the material quickly. Invoice factoring can give you the cash boost you need to make better purchasing decisions, including getting those bulk discounts.

3. Buy Based on Subscription

Working with perishable goods? Those in food manufacturing and similar industries may not be able to buy in bulk because they won’t use all of the supplies in time. In this case, suppliers are more likely to work out discounts based on how consistently you purchase from them. Some suppliers have moved to subscription models; however, you may not be able to take advantage if you have an inconsistent cash flow. Invoice factoring can help. 

4. Accounts Receivable Management

When you use invoice factoring you do not need to manage sent invoices or chase clients to pay you. This can save a ton of time and money. Not having to remind clients about invoices and arrange for payment may mean that you can reduce your accountant or receptionist staff or freeing them up to maximize your business in other ways.

5. Save on Collections Agencies

There are some clients who just won’t pay, so you need to use collections agencies or other expensive measures to get your money from them. One great thing about non-recourse invoice factoring, is that you never have to worry about collecting from a client. If they don’t pay, your factoring company will do the work of taking them to court for you.

At J D Factors our team will work with you to create a plan to reduce your operating costs. Reach out today to learn more about how factoring can help your business.

4 Invoice Factoring Mistakes to Avoid at All Costs

Invoice factoring can be a useful tool to keep your cash flow healthy and your business growing. It’s often your best alternative to a bank loan or line of credit. However, invoice factoring isn’t something you want to jump into without fully examining how it will work for your business. Here are four invoice factoring mistakes you should avoid at all costs.

Mistake #1: Choosing Recourse Factoring When You Want Non-Recourse Factoring

Have you decided that factoring is best for you because you’re finding it challenging to collect from clients who are chronically late? Or, have you grown so fast that money is out the door before you get paid for previously completed projects? There is always a risk that some of your clients cannot pay, whether because of poor cash flow of their own or even bankruptcy. If so, who is responsible for the bad debt?

In recourse factoring, you’re responsible for bad debt regardless of the reason for nonpayment and you have to pay your factoring company back for the full invoice amount and any fees your customer refuses or can’t pay.

However, if you chose non-recourse factoring, the factoring company takes the hit if the reason for nonpayment is a credit issue, such as bankruptcy or if they’ve closed their doors, moved away, or have poor cash flow themselves.

Generally speaking, recourse factoring is best for companies who know and trust their customers, while non-recourse factoring is best for those who are new to the business and are looking to grow. However, choosing the right type of factoring for your business is not quite so cut and dry.

There are several myths out there about recourse versus non-recourse factoring which cause confusion, and it’s important to understand the differences between recourse and non-recourse factoring before making a decision about what’s best for you.

Some people think that with non-recourse factoring you’ll get lower advance rates or that it’s harder to qualify which is simply not true. Also, some people dismiss non-recourse factoring thinking that it’s unaffordable. While non-recourse factoring can be slightly more expensive because you’re paying for the additional protection, at
J D Factors we offer very competitive rates for non-recourse factoring.

Considering these facts, for most businesses, especially B2B companies, it makes sense to mitigate your risk of bad debt with non-recourse factoring, which provides peace of mind that you will be paid and able to pay your own obligations.

Mistake #2: Making a Price-Based Decision

A common mistake people make is choosing a factoring company based on price alone. It’s important that the factoring company knows and has experience in your industry. As well, ensure that they understand your needs, are flexible and have a simple termination policy. As you can see, when it comes to choosing a factoring company there’s a lot more to consider than price alone.

Mistake #3: Misunderstanding the Fees of Your Factoring Agreement

Factoring companies make money by taking an agreed upon percentage of each of your invoices. There may also be charges for other services you ask for. It’s important to understand how much these fees are. J D Factors stands alone with fully transparent pricing, with no hidden fees.

A factoring company may, for example, charge their fee on each invoice you send them, by only advancing a certain percentage of the invoice It’s best to understand the fees and schedules before you sign up.

Mistake 4: Accepting Payments from Clients Instead of Re-Directing

It’s important to ensure that your transfer to factoring is complete. You don’t want to be receiving money from your factoring company and your client, as you’ll end up paying much more or even losing your reserve amount. Instead send your customer’s payments to your factoring company immediately.

Or, partner with a factoring company like J D Factors that does all of the legwork for you and direct your customers right to them for payment. It is important for the lines of communication to always be open between you, your customer, and your factoring company. It may take a bit of time for your customers to adjust to this, but once they do it will be smooth sailing.

J D Factors is dedicated to helping you avoid the common pitfalls of switching over to factoring. We have experience guiding companies and their clients with our exceptional customer service and custom solutions. Reach out to us today to learn more.