Plenty of businesses calculate the money they have based on the invoices they send out — but this is the type of accounting warned about in that adage about counting chickens. In fact, your accounts receivable, which contains the sums you are waiting to accept from your clients, isn’t money at all; if anything, it is an obligation. To ensure your accounts receivable is fulfilled, you have to devote time and energy to writing and sending invoices, checking in throughout the payment window, and legally pursuing clients to become delinquent.
Still, your accounts receivable is valuable, which means you can use them to transform that obligation into cold hard cash. Here are a few ways you can take full advantage of your accounts receivable to improve your business:
Accounts receivable financing allows you to use your outstanding payments from customers as collateral for a financing agreement — or a loan. Sometimes called A/R lending or advancing, this funding option operates like nearly any other loan: You receive the money you need now, and over time, you repay the loan using the income you generate through your business. If you fail to make payments, your lender can cease your accounts receivable and collect payments directly from your clients.
Unfortunately, to frequent confusion, receivable financing has another meaning that utilizes a variety of names: invoice financing, discounting, and (most commonly) factoring. This is the sale of unpaid invoices to a third party, called a factor, who then typically assumes the responsibility of acquiring payment from your clients. Unlike A/R loans, you won’t need to repay factors for this service; instead, they take a reasonable percentage of your accounts receivable as compensation.
Though it isn’t a flashy funding option, factoring is incredibly common amongst B2Bs and B2Gs. B2Cs have fewer factoring options available because consumers are less trustworthy and more difficult to track than businesses or government agencies. Here are some tips to help you optimize your factoring experience:
- Have clear payment terms. Most factors require specific payment periods and unambiguous conditions. You are more likely to receive amenable rates when you have strict contracts in place.
- Use credit limits. When clients need some time and space to make payments, you can offer them credit — but you should have rigid credit limits in place. Especially with new customers, limits allow you to get a sense of client payment habits without risking too much money.
- Choose which invoices to factor. There are several different types of factoringwhich split up the risk and rewards of payment collection in different ways. No matter what, you should maintain control of which invoices you sell, or else you could get stuck with the least trustworthy, most uncertain clients.
- Shop around. Different factors will offer different rates and terms. The first factor you find might not be the best for your business. It is wise to get quotes from several factors — and use their quotes against one another to obtain the lowest rates.
It might be that your business is doing just fine, but your accounts receivable is so disorganized that you can’t tell what’s coming in and going out. Before you launch into either of the above two accounts receivable solutions, you should try to refine your receivable process to better understand your business’s greater financial picture. Here are a few refinement methods to test:
- Go paperless. Paper invoices carry the cost of printing, sending, and storing. Electronic invoices are much more affordable — almost free — and they are easier to search through when the time comes. You might even use invoice management softwareto streamline the whole process.
- Select clients carefully. It might seem counterproductive to reject any clients, but by taking on projects untrustworthy clients, you are wasting time and money. You should review your clients’ creditworthiness before you enter into any agreements.
- Manage contracts efficiently. Your client contracts stipulate product information, quality standards, payment terms, delivery deadlines, and other critical information. By using a contract management system, you can effortlessly manage that data to ensure you and your clients are behaving appropriately to your agreed terms.
- Maintain contact. After you send your invoices, you shouldn’t wait quietly and patiently for payment. The loudest chick gets fed first — which is to say by reminding your clients of your presence, you are likely to receive payment sooner.