How to Offer More Competitive Payment Terms with Factoring

Picture this: you and a competitor are trying to win over the same customer. Your offers and pricing are similar, and the customer is hesitant to decide. Both of you follow standard industry payment terms, requiring payment within 30 days of receipt. However, your competitor offers 60 days to pay, winning the customer by providing more competitive payment terms.

You’ve likely faced a similar situation or wanted to extend terms for a favourite client but couldn’t due to the strain it would place on your cash flow. This scenario plays out across Canada every day. But it doesn’t have to be this way for your business. In this article, we’ll explore how you can use factoring to offer more competitive payment terms, keeping your customers happy without burdening your business with lengthy waits.

Businesses Often Give Clients 30 to 90 Days to Pay

Standard invoicing terms are the set timeframes within which a client is expected to pay for goods or services after receiving an invoice. Common terms include:

• Net 30: Payment is due within 30 days.
• Net 60: Payment is due within 60 days.
• Net 90: Payment is due within 90 days.

Different industries have varying standard payment terms based on their operational cycles and cash flow needs. For example:

• Manufacturing and Wholesale: Often use Net 30 or Net 60 terms due to the time it takes to produce and distribute goods.
• Construction: Frequently relies on Net 60 or Net 90 terms because of the extended duration of projects and the need to coordinate multiple subcontractors and suppliers.
• Retail: Typically operates on shorter terms like Net 30 to manage rapid inventory turnover and maintain liquidity.
• Professional Services (consulting, legal, accounting, etc.): May use Net 30 or Net 60 terms, balancing the need for prompt payment with client cash flow considerations.

Offering Extended Payment Terms May Be Vital to Business Growth

Businesses offer longer payment windows for several reasons.

• Competitive Edge: Extended payment terms can make a company more attractive to potential clients, offering flexibility and easing the client’s cash flow management.
• Building Relationships: Longer terms can foster a strong customer relationship

by demonstrating trust and cooperation.

• Client Needs: Some clients may have longer operational cycles and require extended terms to align payments with their revenue streams.
• Market Norms: In certain industries, longer payment terms are the standard practice, and businesses must adhere to these norms to remain competitive.

Waiting for Payments Can Cause Significant Strain

Waiting for payment can pose significant challenges for small and mid-sized businesses, especially when payment terms are longer.

Cash Flow Management

• Operational Expenses: Smaller businesses still need to cover their daily operational expenses, such as salaries, rent, utilities, and supplies, even while waiting for customer payments. Delayed payments can create a cash flow gap, making it difficult to meet these obligations.
• Growth and Investment: Without steady cash flow, investing in growth opportunities, such as marketing campaigns, new equipment, or expanding staff, becomes challenging. The lack of immediate funds can hinder a business’s ability to scale.

Financial Stability

• Debt and Interest: To manage cash flow gaps, smaller businesses might rely on credit lines or loans, which accrue interest and increase financial burden. This can erode profit margins and add financial stress.
• Supplier Relationships: Businesses must also pay their suppliers on time to maintain good relationships and avoid late fees or supply disruptions. If their cash flow is tied up in unpaid invoices, it can jeopardize these relationships.

Market Competitiveness

• Flexibility: Larger competitors may have more resources to absorb delayed payments without significant impact. Smaller and midsize businesses, however, lack this cushion and may struggle to offer the same flexible payment terms, potentially losing customers to competitors.
• Discount Opportunities: Many suppliers offer early payment discounts. Without sufficient cash flow, smaller businesses miss out on these cost-saving opportunities, which can be particularly beneficial for maintaining healthy profit margins.

Stress and Administrative Burden

• Administrative Overhead: Chasing late payments and managing cash flow consumes valuable time and resources. For smaller businesses, this means diverting attention from core business activities, such as sales and customer service.
• Uncertainty: The uncertainty of not knowing when payments will arrive can cause significant stress for business owners, impacting their decision-making and long-term planning.

Factoring Allows You to Offer Competitive Payment Terms Without the Strain

Factoring, or invoice factoring, is a financial solution that allows businesses to sell their unpaid invoices to a factoring company at a discount in exchange for immediate cash. Let’s take a quick look at the basics of factoring.

How Factoring Works

The factoring process is straightforward. Approval can happen in as little as a day and payments may be made on the same day you submit your invoices. A snapshot of how the process typically works is outlined below.

• Invoice Generation: The business provides goods or services to its customer and issues an invoice with payment terms, such as Net 30 or Net 60.
• Submitting Invoices: The business submits its unpaid invoices to the factoring company. This can usually be done electronically for convenience.
• Verification: The factoring company verifies the invoices to ensure they are valid and accurate. This step helps eliminate any payment disputes.
• Advance Payment: Upon verification, the factoring company advances a percentage of the invoice value to the business, typically ranging from 60 to 95 percent. This advance provides immediate working capital.
• Collection: When the invoice is due, the factoring company collects the payment from the customer. They handle all the follow-ups and administrative tasks involved in the collection process.
• Final Payment: Once the customer pays the invoice, the factoring company remits the remaining balance to the business, minus a factoring fee. The fee is usually a small percentage of the invoice value.

Factoring vs. Traditional Financing

Factoring is a flexible and fast solution for businesses needing immediate cash flow based on their receivables, without adding debt to their balance sheet. It is particularly useful for businesses with creditworthy customers but limited credit history.

Traditional Financing provides access to potentially lower-cost funds but involves a more complex application process, adds debt, and requires regular repayments. It is suitable for businesses with strong credit and long-term financing needs.

There Are Many Benefits of Invoice Factoring in Business

This process can significantly alleviate the strain of offering competitive payment terms and offers a multitude of benefits.

Immediate Cash Flow

• Quick Access to Funds: Factoring provides immediate access to cash by converting unpaid invoices into working capital. This means businesses don’t have to wait 30, 60, or 90 days to receive payments from their customers.
• Enhanced Short-Term Liquidity: With improved cash flow, businesses can better manage their day-to-day operations, pay suppliers on time, and meet payroll obligations without stress.

Offering Competitive Terms

• Attracting Customers: By offering longer payment terms, businesses can attract more clients who prefer flexible payment schedules. Factoring enables this without compromising the business’s own cash flow.
• Building Relationships: Extended payment terms can foster stronger client relationships and customer loyalty, as clients appreciate financial flexibility.

Financial Stability

• Avoiding Debt: Unlike loans, factoring does not involve taking on debt. Businesses receive an advance on their invoices, which they are already owed. This keeps the balance sheet clean and avoids interest payments.
• Credit Risk Management: Factoring companies often assume the credit risk of the invoices they purchase. This means businesses are protected if a customer fails to pay, adding an extra layer of financial security.

Operational Efficiency

• Focus on Core Activities: By outsourcing the collection of invoices to a factoring company, businesses can focus on their core operations, such as sales, production, and customer service, rather than spending time chasing payments.
• Administrative Relief: Factoring companies handle the administrative burden of collections and credit checks, which can be particularly beneficial for small and midsized businesses with limited staff.

Growth and Investment

• Seizing Opportunities: With immediate cash flow, businesses can take advantage of growth opportunities, such as bulk purchasing discounts, marketing campaigns, and new product development.
• Scalability: Factoring grows with your business. As sales and invoice volumes increase, the amount of available working capital through factoring also increases, supporting expansion efforts.

Be Mindful When Choosing a Factoring Partner

Choosing the right factoring partner ensures a smooth and beneficial experience. Below are a few key factors to consider.

Reputation and Experience

• Track Record: Look for a factoring company with a proven history and positive reviews. Companies with industry-specific experience can offer tailored services.
• References: Ask for references from other businesses in your industry.

Terms and Fees

• Advance Rates: Understand the percentage of the invoice value that the factoring company will advance to you. Typical rates range from 60 to 95 percent.
• Fees: Evaluate the factoring fees, ranging from one to five percent or more. Ensure you understand any additional charges, such as setup or termination fees.
• Contract Terms: Review the length and terms of the contract. Some companies require long-term commitments, while others offer more flexible arrangements.

Services Offered

• Recourse vs. Non-Recourse Factoring: Determine whether the factoring company offers recourse factoring, where you are liable if the customer does not pay, or non-recourse factoring, where the factoring company assumes the credit risk.
• Additional Services: Some factoring companies offer additional services, such as credit checks on your customers, collections management, and online account access.

Customer Service

• Support: Assess the quality of customer support. Reliable and responsive service is essential for addressing any issues promptly.
• Transparency: Ensure the factoring company is transparent about its processes and terms. Clear communication is vital for a successful partnership.

Flexibility and Customization

• Tailored Solutions: Look for a factoring partner that can customize their services to meet your specific needs, whether it’s selective factoring (choosing which invoices to factor) or full-service factoring.
• Scalability: Ensure the factoring company can scale their services as your business grows.

Offer More Competitive Payment Terms and Boost Customer Satisfaction with Factoring

Factoring provides immediate cash flow from unpaid invoices, which can enable you to offer more competitive payment terms and boost client satisfaction without financial strain. Factoring Companies Canada can help you find a reliable factoring partner who understands your industry and meets your specific needs. To take the next step toward increased client happiness and more competitive payment terms, request a complimentary rate quote.

FAQs About Competitive Payment Terms Through Factoring