Cash Is King
Robert S. Bernstein has written a book called, Get P.A.I.D. — A Guide to Getting Paid Faster. He explains the four pillars of “getting paid” (Preparation - Assessment - Implementation - Defense) in his article, Credit to cash. Businesses desiring payment must give credit wisely.
Two of the key points he makes are:
(1) that most small businesses extend credit to their customers whether they realize it or not, by performing services and providing goods before getting payment, and
(2) that there are hidden costs to operating your business by extending credit, whether you realize it or not.
He writes:
Small businesses and entrepreneurs need help deciding when to extend credit to customers and how to make sure they get paid. In case it isn’t clear, when a business extends credit to a customer (selling goods or services on credit), it is risking a loss in order to make a profit. If the customer doesn’t pay, all the materials, labor and know-how to produce that order have gone for naught.In addition, there are many hidden costs to extending credit for a business.
The cost of capital (that could be used elsewhere), the cost of staff to monitor credit, the cost of collecting delinquencies and the cost in damage to the relationship with delinquent customers.
These costs escalate the longer-past due a customer gets. Thus, it is very important to have the correct business processes to know how to extend credit, how to manage the credit you extend and how to collect from your customers.
I would suggest that those hidden costs are ones to consider in weighing factoring as an option.
Yes, with factoring you pay a fee to a factor. In exchange for that fee, you receive a large chunk of the money owed you right away, within a few days, sometimes within one day. And the remainder of the money (less the factoring fee) is paid when the invoice is collected.
However, as you decide on a course of action and consider whether factoring is right for you, you might want to balance those “hidden expenses” against the factoring fee. You may not necessarily be saving any money if you have to wait months to get paid.
