If your small business serves big commercial clients, then one of the hardest challenges is figuring out how to preserve your cash flow when your customers are routinely taking 30, 60, even 90 days to pay off their invoices. This is money that your business needs to cover expenses like payroll, rent, and utilities. Not only does this affect day-to-day operations, but when collections continue to lag behind expenses, it can significantly impede vital business growth and development.
While there are no shortage of articles out there offering tips for dealing with slow paying customers, most of these tips (such as shortening the billing cycle and stepping up collections efforts) will not help the small and mid-sized suppliers and vendors that work with big corporate clients. Let's get real here for a moment... If your small company just landed a contract with a big corporation like Coca Cola or Tyson Foods, both you and your client know just who is holding the cards in this arrangement. After all, if you don't want to agree to their terms and conditions, there are plenty of other companies out there ready and willing to take your place.
A few years ago, the White House even proposed a solution to this dilemma. The initiative, dubbed “SupplierPay,” is an attempt to ease the cash flow issues faced by many small and medium-sized businesses by encouraging large corporations to shorten the payment schedules to their small suppliers. So far, 26 well-known corporations have signed on including: Apple, IBM, Coca-Cola, FedEx, Honda, CVS and Walgreens.
But, at the risk of sounding a bit cynical, the million dollar question is: what's in it for them? After all, these corporations are in effect enjoying a free short-term loan from their small suppliers and contractors. Why would they even want to change that?
The best answer is that the corporations that will actually carry through with the plan are probably using a system like Taulia, a company that provides Web-based invoicing as a service to large corporate customers. These corporations then leverage their position and convince their smaller suppliers to also use Taulia. When these small companies do so, they can then take advantage of an early-pay option that cuts the normal 60 to 90 day pay cycle down to just a day or two.
The catch? Taulia charges suppliers a hefty 10% annualized fee for this early pay service and splits that revenue with their corporate customers. In effect, these corporations are now enjoying a nice “early pay discount.”
Now, don't get me wrong. I have nothing against Taulia. This company is offering a great service and there is a both big need and demand for it. Plus, a 10% fee is reasonable. But at the same time, smaller suppliers should know that they do have a cheaper alternative.
One such alternative is invoice factoring (also known as accounts receivables or AR factoring). This form of non bank funding allows you to finance the slow-paying invoices from your creditworthy commercial customers. Your business would receive 70-90% of the total value of the outstanding invoice up front (The exact rate is generally dependent on the age of the account.) The factor company would then assume responsibility for collecting the outstanding invoice. Upon full receipt of the payment from your corporate customer, the factor company will return the remaining balance, minus a small processing fee that usually hovers around 2% to 3%.
So, instead of waiting 30, 60, or 90 days to get paid, you get immediate funds from the factoring company and thus preserve your cash flow. You can use these funds to pay expenses while your customers continue to pay on their usual schedule. Just make sure you are using some really good accounting software so that you are on top of your cash flow.
When it comes to working with corporate clients, the payments game is very much rigged in their favor, and your cash flow can suffer significantly because of it. Invoice factoring helps to change the rules in a way that gives more financial control to those who need it the most