In Accounts Receivable Factoring, Finance Highlight

Many owners of small and mid-sized businesses are letting revenue slip through their fingers with every invoice they issue, says Brian Holden, Chairman and CEO of AR Funding. The bigger issue is that they don’t even realize it. 

A CPA and business owner with decades of financial, audit, and tax experience, Brian Holden has built a career helping business-to-business (B2B) companies achieve their goals. The years have taught him that one of the biggest predictors of success is a healthy cash flow, which is one of the reasons he founded AR Funding in 1996. By giving businesses cash as soon as they invoice customers, AR Funding can accelerate their cash flow by 30, 60, or even 90 days. The process, known as invoice factoring, can make all the difference to the business’s ability to stabilize operations or pursue growth opportunities. 

While factoring is one way to access cash sooner, there are steps that every business owner can take right now to prevent the payment delays and write-offs that can put businesses in financial jeopardy.  

In this article, Holden shares his top three tips for ensuring timely payment for the delivery of goods and services, which can put tens or even hundreds of thousands of dollars back into the business. 

Payment delays cost money 

In Holden’s experience, businesses of every size and in every industry can lack awareness about the impact late payments and customer defaults have on their financial health and overall success. 

“People forget that this is real money,” said Holden. “This is money they could be using to reduce the fees and interest they pay on loans or to invest in the equipment, inventory, or sales and marketing they need to generate more business.”  

A 2022 survey by PYMNTS found that 93% of businesses experience late payments from customers, and research by Atradius found that 47% of all B2B invoices (invoices issued by businesses that sell products and services to other businesses) issued in the U.S. were paid late. Even more concerning, 6% of the total value of B2B invoices were written off completely, a figure that represents hundreds of millions in revenue lost every year. 

Based on his experience working with AR Funding clients, Holden pointed to three best practices that every business can put in place right now to avoid leaving money on the table. 

Get tough on terms 

Every business negotiates the terms on which they accept payment, but far fewer enforce those terms. Most businesses are lenient with customers who need to delay payment, especially when those customers are prestigious, big spenders, or have given the company their business for a long time.  

But when businesses compromise on payment terms, it disrupts cash flow, increases the cost of operations, and raises the risk of nonpayment.  

“Businesses have a hard time saying, ‘I complied, I shipped, or I performed. Now you need to live up to your side.’ But every time an invoice goes beyond 10 days past due, there’s a percentage of that amount that’s going to be a write-off,” said Holden. He points out that when clients delay payment, they are essentially stealing credit from the business owner, because they can now finance their business without paying finance charges.  

“While enforcing payment terms can feel personal, it’s really just business, and a reasonable customer will understand that. After all, they already agreed to those terms.” 

Get tough on credit limits  

A business employs salespeople to generate as much business as they can. But while every customer is a potential source of revenue, they are also a potential source of risk.  

“Don’t forget that your customers are your debtors,” said Holden. “You are incurring a financial risk every time you do business, and the consequences can impact your business for years.” 

“Let’s say you’re a business with 10% margins and you’re forced to write off $100,000,” he explains. “You’re going have to give away a million dollars of business for free in order to pay yourself back for what you just lost.”  

Holden warned that this can happen even with long-term, trusted customers. A few years ago, an AR Funding client ignored the factor’s advice to cut off credit to a customer they had supplied to for nearly 20 years. They lost more than a million dollars when the customer went bankrupt. And the situation is not uncommon: In 2022, there were 13,125 business bankruptcies, and that number tends to rise along with interest rates and economic volatility. (In 2020, the number rose to 22,391.) 

Every business should obtain a business credit score for each customer, assign credit limits based on their level of financial stability, and enforce those limits throughout the lifespan of the relationship.  This is also something a good factoring partner can provide as part of their service.

Pay attention to the details 

As with most financial issues, the devil is in the details when it comes to protecting business cash flow. 

Something as small as a single typo can result in payment delays or defaults. For example, any of these mistakes can technically void a customer transaction: 

  • The order ship date indicated on the invoice is earlier than the actual ship date 
  • There is a typo related to the quantity, quality, price, or PO number of the order 
  • There are minor mistakes in formatting (especially if your business communicates via electronic data exchange) 

In each case, the customer has the right to decline payment on the invoice and request a replacement, which means starting over and resetting the 30, 60, or 90-day payment cycle.  

And for every day of delaying tactics, that’s another day that your business is not paid for their products and services and another day that they will need to pay interest or fees for the cash they need to run the business.  

“Businesses assume that everyone will be reasonable, but the customer is within their rights to return the merchandise, request a discount for accepting them ‘late’ or demand a reissued, accurate invoice,” said Holden. “When the business makes these kinds of mistakes, it takes away their leverage.”  

Ideally, each invoice will be reviewed by two people before being sent to the customer, with special attention paid to the date of service rendered or product shipped, service or product description, shipping address, PO number, and buyer name and contact information. 

Better collections mean better business 

While businesses put their focus on sourcing opportunities and securing new customers, they often short-change themselves when it’s time to collect the revenues. But it pays to take invoicing and collections seriously.  

Bringing more discipline to the process of enforcing payment terms, credit limits, and invoice accuracy can create more predictable cash flow, increase revenue, reduce operational costs, and even improve the business’s credit ratings and access to credit.  

If your business could benefit from a faster, more predictable cash flow, try following the best practices featured in this article, or explore your invoice factoring options with an AR Funding representative.  

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