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.

How Accountants Can Use Factoring to Simplify Tax Season for Clients

Many small and medium-sized enterprises (SMEs) are first drawn to an accountant's services when they realize they have made a mistake on their taxes or are facing an audit. As an accountant, you bear the duty of telling your client the bad news, that they are in tax arrears. It’s only natural to want to help them out of this unfortunate situation.

When you’re helping these clients fix mistakes in their own accounting process and find ways to pay their back taxes, factoring may be a great option to help achieve a positive cash flow and assist with tax arrears. Here’s how:

Pay the CRA with Money Owed

Factoring allows SMEs to immediately convert their accounts receivable into cash and allows them to get the money they are owed immediately after sending out an invoice. This predictable, positive cash flow can give your clients the ability to pay their owed taxes right away, preventing them from incurring more penalties from the CRA.

If your client has had difficulty putting aside and remitting HST in the past, J D Factors can help. We can only hand over the gross amount of your client’s invoices, retaining the HST. Thus, your client never has the HST on hand and does not need to pay to maintain a separate account for it. This saves your clients time, money and hassle.

Of course, if we hold back your client’s HST we will remit it to the government on whichever schedule they prefer, or are mandated to use, whether yearly or quarterly. This saves your client the time and hassle of making these remittances themselves. They won’t have to wait at the bank and won’t have to worry about forgetting to remit.

Payroll and payroll taxes like the Canada Pension Plan (CPP) and Employment Insurance (EI) are other major hurdles for many SMEs. Those who struggle to keep a positive cash flow and who can’t make payroll will fail to retain their top talent. They will also struggle to remit CPP and EI on time. In fact, these non-remittances carry the highest penalties.

Why Should You Recommend Factoring?

Your business clients look to you as a financial guide, and the more potential solutions you have in your pocket, the more value you can offer them. Factoring is one option that your clients may not have heard of, and that can benefit your most vulnerable clients, those in tax arrears.

Factoring offers a win-win, benefiting you as an accountant, too. You won’t have to deal with calls from the CRA if your client fails to remit their HST or payroll taxes because J D Factors will be submitting these funds on time for them.

J D Factors is also dedicated to working with companies that are unable to gain traditional financing from a bank. We can help your client’s business stabilize again. If they recover from their financial troubles, they’ll be around for many years as your loyal client.

Reach out to us today to learn more about J D Factors and how factoring can help your clients.

Track These Metrics to Monitor the Pulse of Your Business’ Cash Flow

Understanding your cash flow is essential to the health of your business. A strained cash flow will limit your potential, stopping you from taking advantage of new opportunities. In fact, a very limited cash flow could push your business into debt as you lose more in costs than you bring in. You need to be aware of your cash flow to make the best decisions for your business.

According to QuickBooks, the Small Business Administration found that a problem in financial structure is to blame for 28 percent of business bankruptcies. Unless you understand your cash flow, you could be next. Here are the key financial metrics you need to monitor to understand the state of your cash flow.

1. Accounts Payable

How much money needs to go out your door? This metrics includes all the bills you haven’t yet paid like payment for materials, supplies, contractors, and more. It’s a good idea to calculate the accounts payable that you owe now and estimate next month’s figure too. You should compare both to the next figure: accounts receivable. 

2. Accounts Receivable

How much money is owed to you? Your accounts receivable is the total of funds your clients should have paid you already. If your accounts payable is higher than your accounts receivable, you have a problem. If they are tight, you also have a problem. You need to be able to bring money in quickly to stay flexible and competitive. When comparing these figures, don’t forget to write off bad debt, or your accounts receivable will be inflated and misleading.

3. Time Worked for Small Businesses

The smaller your business the more relevant your time worked will be to your overall business cash flow. If you’ve worked significantly less, perhaps due to illness, you can forecast a reduction in accounts receivable. Cut back on accounts payable, or be in the red.

4. Free Cash Flow for Corporations

Larger, more complex businesses will benefit from looking at free cash flow over time worked. You’ll need to find your earnings before interest, tax rate, depreciation, amortization, and add them. Then subtract your capital expenditure, like mortgage payments and equipment costs, and subtract any change in net working capital. Free cash flow can help you ensure you’re not cutting into your business’ cash flow too much.

5. Cash Burn Rate for Start-ups

If you’re a funded start-up, it’s critical to monitor your cash burn rate and ensure you’re not limiting your cash flow by over-spending. You need to increase your accounts receivable before your “cash runway” ends.

The Solution: Accounts Receivable Financing

No matter your business size or type, if you have cash flow problems, you need to get the money owed to you in the door faster. Accounts receivable financing is a cost-effective way to do that. J D Factors will take care of your business invoicing for you. Send us an invoice and we will pay you for it within 24 hours, and then invoice your clients or customers on your behalf. With invoice factoring you’ll see a healthy cash flow is right around the corner.

The True Cost of Your Receivables – What You Stand to Lose with Outstanding AR

Outstanding accounts receivable costs your business more than you think—and chances are you’re already frustrated with your business’ cash flow. Measure your costs with days sales outstanding (DSO), consider borrowing costs, and discover how to lower the costs of your outstanding accounts receivable.

Consider Borrowing Costs

To improve cash flow, many companies borrow against their account receivables. The largest companies often get a reasonable interest rate, but the smaller your company is, the more likely it is that you’ll get an unwieldy interest rate —just to access money you’ve already earned.

Tip: Reduce your borrowing costs by getting your accounts receivable filled faster and reducing your DSO.

Measure Your Days Sales Outstanding

There are a few ways to measure your account receivables, but DSO is one of the most valuable methods. It measures how many days it takes from delivering your product or service until the cash from that payment is in your hands.

Most companies add 30 days to their DSO right off the bat by having net 30 payment terms, and net 60 is quite common as well. But when a customer pays a few days past that, let’s say 14, your DSO is 74. That’s 74 days of missed opportunities.

You can cut your average DSO outright if you can reduce your payment terms, but this can be frustrating for clients. Otherwise, you’re essentially at the mercy of your clients and when they choose to pay.

While you wait, you collect borrowing costs and you lose out on business opportunities you may have pursued if you had a better cash flow. Even if you collect interest on outstanding payments you won’t outstrip your overall borrowing costs.

If you are growing, you’ll find you have a higher average DSO, as new clients drain your cash without immediately paying you. This creates a real problem if you want to keep growing. And, of course, you do want to keep growing.

You’re Losing Time and Money

Collecting your outstanding accounts receivable (AR) faster is possible, but it costs both time and money. Hiring experienced collections staff and giving them the resources to pursue your clients is a large drain on your time and resources. There are staff and collections strategies that can get your clients payments faster, but at what cost? There is a better alternative.

Accounts Receivable Financing

There’s another way to reduce the cost of your outstanding AR. Invoice factoring through J D Factors will reduce your DSO to one! You send your invoice to us, not to your client, and we pay you the balance within 24 hours.

From there, we invoice your client on your behalf and take on the costs of collecting. In fact, J D Factors offers non-recourse factoring, which means we also take on the risk of non-payment. In a single day you’ll have the resources you need to keep investing in your business. Stop worrying about borrowing costs and sinking time and money into collecting on your outstanding accounts receivables. Contact J D Factors today to start the approval process.

Non-Recourse Factoring

You’ve likely dealt with frustrating clients before. Sometimes a debtor will simply avoid you until they declare bankruptcy. Some are just chronically late or irresponsible and dealing with them can be just as tough.

Sometimes, it takes a lot of work to get clients to hand over the money you’ve earned. There are plenty of techniques to chase clients down, including contacting them regularly, using an escalating tone, claiming interest, and even bringing the client to court. Not only will these steps sour your relationship, but they cost time and money you don’t have.

With factoring, you receive your payment from a factoring company, who issues your invoices and collects payment on your behalf. Factoring is a huge benefit to your business, but non-recourse factoring is even better. That’s because non-recourse factoring removes the credit risk of unpaid invoices.

With traditional factoring, if a client or customer refuses to pay, the factoring company usually expects you to buy the accounts back, at their original cost. To do this, they often withhold some of the value of your future invoices (which defeats the main benefit of invoice factoring—it’s predictability). While it’s helpful that you save some of the costs of dealing with your unpaid invoices, this kind of accounts receivable financing leaves the biggest risk in your hands.

Non-Recourse is The Smarter Choice

Non-recourse factoring is different. At J D Factors, we pay you within 24-hours after you issue an invoice and we take on all the risk and costs of dealing with your clients. If they never pay, that’s our loss. Period. That’s why non-recourse factoring is a great risk management option for your business.

At J D Factors, we’re experts at collecting on accounts receivables. We have the experience and techniques to minimize the risk from the accounts we take from you. We’re good at what we do, so you can spend your time doing what your business is all about—delivering your products or services.

An Investment in Your Time

Rather than worrying about unpaid invoices or cash flow, with non-recourse factoring you simply pay a factoring fee to save yourself the time and money you’d be spending chasing after clients. When you offload your unpaid invoices to J D Factors you won’t have the worry of a credit risk associated with some clients. Non-recourse factor allows you to establish worry-free relationships with new clients. If they turn out to be bad risks, the risk is ours. You’ll still get paid.

Contact J D Factors to start non-recourse factoring and truly free yourself from the drain of unpaid invoices.

Sources:

http://blog.factorfunding.com/blog/what-are-the-differences-between-recourse-and-non-recourse-factoring/

http://www.rtsfinancial.com/guides/difference-between-recourse-and-non-recourse-factoring

Improve Your Cash Flow by Clearing These Payment Hurdles

Poor cash flow is a constraint on your business. Did you know that there are many payment hurdles keeping your clients and customers from paying you faster? Here are some tips on how to overcome these hurdles and minimize your outstanding payments:

1. Negotiate Payment Options Up-Front

People are used to doing business a certain way, and when your payment policies differ from what they are used to, they may find themselves unprepared to make your payment when it is due. You can avoid this problem by clearly stating your terms before you provide your goods or services.

If your terms are radically different from what your client was expecting and they’re already late with your payment then it makes sense to compromise with them on terms this time and insist your policies be followed in the future.

It is also a good idea to allow multiple payment plans, so that your clients can pick a schedule that works for them. However, not all business structures allow for clients to pick and choose which payment elements they like, and this can become complicated if you have many clients asking for different payment plans. Ultimately, all of your payment plans should work for you. It’s fair to ask for account payables within 30 days of your invoice. 

2. Confront Outstanding Accounts

You’re very busy, but it’s important to contact a client the moment they miss a payment. Your early and polite request will give them an opportunity to pay you if they simply forgot or made a clerical error. If not, this early pressure makes it clear that you’re paying attention to their account. It also minimizes their excuses later. They can’t argue they weren’t aware a payment was overdue if you contacted them about it immediately.

If they continue to delay their payment, you should be reminding them regularly, in an escalating tone, that their payment is past due. Remind them that your late payment policies may come into effect if they continue to default on their payment.

3.  Enforce Your Policies

Set policies for late payments and enforce them, otherwise routinely late clients will take advantage of you, to your business’ detriment. Claim interest where it’s due and if this isn’t part of your existing policy be sure to set a new policy explaining that late payments will accrue interest. Having to pay more money if they continue to delay payment is very motivating to clients, especially when they are strapped for cash.

4. Keep Struggling Customers and Clients with Factoring

You customers and clients might be struggling financially, whether their industry has taken a bad turn or their business is failing, or their personal finances are not in order. Of course, you feel for you clients because you have a good relationship with them, which makes overcoming this payment hurdle a challenge.

If you’ve decided to extend the payment period for a struggling customer, protect yourself next time and insist they make a deposit up front. You can also do this with habitually late clients or customers.

Alternatively, factoring is a solution to your cash flow problems that doesn’t require you to risk souring your relationship with your customers and clients in order to get paid. Through J D Factors you can get up-front accounts receivable funding as soon as you send out an invoice, and we take care of chasing down your customers for payment. We even take on the credit risk! Contact J D Factors today to learn more.

Calculating the Cost of Your Outstanding AR

Your outstanding accounts receivable (AR) are costing your business money, but how much? The Harvard Business Review published a report detailing just how much outstanding AR costs businesses, depending on how long the account goes unpaid.

The study found that if your invoices are unpaid for 30 days, your business is losing 1.82 percent of the total amount. According to Advantage Business Magazine, Harvard’s calculation takes into account six forms of cost including: time, administrative cost, opportunity cost, predictability, financing, and bad debt (Click here for more information).

As you would expect, the longer you carry your outstanding AR the more it costs your business in each area. If your accounts are unpaid for 60 days you lose 10.29 percent. If you stretch yourself 90 days without payment, you lose 19.74 percent. And, most disturbingly, if your client hasn’t paid in 120 days, your business is losing 30.71 percent of the account total.

When you calculate the cost of your outstanding AR, it’s easy to get discouraged. Even at the thirty-day mark, your business cash flow is stifled, making you less agile and less able to take advantage of opportunities. The more you can reduce your outstanding AR costs, the better.

Unfortunately, the solution is not as straightforward as you may think. Sinking more resources into administrative costs to get the invoice paid earlier isn’t ideal. Yes, you may get the money in earlier, but you’ve bumped up your costs, so you’re losing roughly the same amount of money, perhaps more if your invoicing strategies don’t work.

Instead of focusing on business invoicing, you can use invoice factoring to cut your costs significantly. You send your invoice to J D Factors, who pays you within 24 hours in cash, and takes on the cost of invoicing your clients or customers. This can save you anywhere from one to 30 percent of each invoice’s value, which adds up quite significantly.

Plus, invoice factoring gives you a solution to the outstanding AR cost problem, means you’ll have the freedom to use your resources strategically. Instead of spending money on administration to get invoices in faster, you will be able to spend that money wherever your business has the biggest opportunity.

Perhaps for you that’s marketing, where you can gain more clients and grow. Or, perhaps that’s in staffing, where you can invest in new talent to increase your efficiency and push your business forward. Whatever your biggest opportunity is, invoice factoring will give you the funds and flexibility to pursue it.

The benefit to you is that you can stop chasing your tail trying to get money you’ve already earned. The benefit for us at J D Factors is that as your business overcomes cash flow problems and grows, you send more work our way.

Invoice factoring can give you the ability to focus on doing what you do best, while our expert team at J D Factors focuses on how to collect your outstanding accounts receivable. Contact J D Factors to apply for our services or to request a custom quote.