We have the opportunity to work with all sorts of companies that come to us in search of accounts receivable funding. As a factoring company, our service involves purchasing invoices and collecting on them. If there is one thing we have learned from years of experience, it’s this: invoicing terms can have a significant impact on collection.
If your company continually struggles to get paid on time, consider your current terms. They could be making collection more difficult than it needs to be. And if this is the case, changing the terms to be more in line with your company’s needs could pretty much solve the problem.
Terms Equal Time
Invoice terms are little more than the amount of time a customer has to pay their bill. A term of 45 days gives a customer roughly six weeks from the date an invoice is issued to pay it. That is really all there is to it. So how could something so simple impact accounts receivable so profoundly? It is all about how customers perceive terms.
A shorter term of 30 days might actually create an urgency in the customer’s mind. To most small businesses, 30 days isn’t much time. It is even less time when a business is struggling with its own cash flow problems. Yet the urgency shorter terms create keeps the outstanding invoice at the front of a business owner’s mind. As long as it stays there, it will get the attention it needs.
A longer term of 45 days allows a business owner to put an invoice on the back burner. Six weeks is plenty of time to take care of it. Unfortunately, it is too easy to set aside an invoice and inadvertently forget about it.
Out of Sight, Out of Mind
Our role as an accounts receivable factoring company gives us plenty of opportunity to deal with invoice collection. Experience tells us that a fair number of slow payers aren’t purposely moving slowly. They just aren’t paying attention. It is an out of sight, out of mind sort of thing. Longer terms give them permission to set invoices aside when they first come in. If nothing compels them to deal with the invoices soon thereafter, they are easily forgotten.
Even when invoices are not set aside and forgotten, longer terms open the door to customers funneling their cash in other directions. They may have every intention to pay on time but fail to do so because they run out of cash.
Try Reducing Your Terms
One of the first things your company should do to overcome a large number of slow payers is to reduce invoice terms. Of course, you don’t have a lot of room left if your terms are already at 30 days. You may have to address some of your slowest payers by requesting that they pay at the time service is rendered.
If your terms are 45 or 60 days, try cutting them in half. There is a good possibility that giving customers less time to pay will generate the kind of urgency they need to stay on top of things. Reducing terms doesn’t always work, but it does work in a lot of cases.
In the meantime, we can help you manage cash flow by way of account receivable funding. Contact us to learn more about how you can sell some of your outstanding invoices to us for a fee. We offer a certain percentage of total invoice value as an upfront payment. You receive the rest, less our fees, when the invoices are paid. Accounts receivable funding is fast, efficient, and easy.