Accounts Receivable Factoring - It's More Than Just the Money

The concept of "core competency" refers to the things done by a business that lie at the heart of its ability to manufacture a product or deliver a service. They are strengths relative to other organizations that are not easily imitated and that can be leveraged across different products and markets.

From a management standpoint, employees should spend as much time as possible working on tasks that contribute directly to the business's core competencies, and as little time as possible working on tasks that don't. Since managing accounts receivable isn't a core competency for most companies, many rely on accounts receivable factoring companies to handle their accounts receivable functions.

Going Beyond Collections

An Oakville, Ontario distributor of photo luminescent material used in exit signs and safety equipment began factoring their accounts receivable in 2008 in order to improve their cash flow. It soon discovered that factoring services offer additional benefits as well.

"This takes the onus off of our employees to manage accounts receivable," says the company's CEO. "It allows them to spend more time focusing on more important issues, while our factoring service handles all the fine details of our accounts receivable management and keeps everyone on the same page."

In short, factoring services allow the CEO to concentrate on what he does best: growing and developing his business.

This particular distributor was referred to a factoring service by its primary bank. "Since we're an emerging company with a new technology, we're not considered traditional, so banks can be a little hesitant until we've proven ourselves," says the CEO. However, the company was incurring heavy expenses on large volumes of raw materials, and the lengthy payment terms of its customers was creating a significant cash flow crunch.

"We work with municipalities, universities, schools, hospitals and Fortune 500 companies," explains the CEO. "They sometimes take a long time to pay. Because of the significant dollars involved, it made sense for us to take the small hit from factoring in order to keep the cash flowing."

The Importance of Vendor Assurance

Another potential benefit of factoring services is what's sometimes referred to as "vendor assurance." In this company's case, its supplier was being asked to produce large quantities, but was a little uncomfortable since they were dealing with a relatively new company. Through its factoring service's Vendor Assurance program, the supplier was persuaded to provide the product on open account terms.

"This provides a safety net to our key supplier by increasing their confidence," says the CEO. "Vendor Assurance was instrumental in helping establish credit in the first place and increasing our credit as suppliers gain a greater degree of confidence in us."

The CEO also likes the fact that his customers are not aware that their invoices are being financed-a feature known as non-notification. Checks are made out to the company and payments are mailed to a generic post office box. When the accounts receivable clerk from his factoring service calls, he or she identifies him or herself as being with the CEO's own accounts receivable department.

Due to fast growth, the company's needs are constantly evolving, notes the CEO, which makes receiving fast and responsive service critical. "I have recommended factoring services to other companies and will continue to do so. Factoring can be a valuable service to small and emerging companies that have strong potential."