An invoice factoring transaction typically consists of three parties. They are the factoring company, the seller of the invoice, and the debtor who’s responsible for paying the holder of the invoice. For a small business, the account debtor is the customer who owes the invoice.
How an Account Debtor Can Impact Factoring
The creditworthiness of the debtor has a major impact on a business’s ability to factor invoices. Unlike traditional financing options where there are two parties to a transaction, factoring includes the debtor and relies on them to make timely payments. If a debtor is late on payments, the business may face higher fees or denial of funding.
Tips for Managing an Account Debtor
Whether your business is interested in getting approved for factoring, or you want to reduce the time it takes for customers to make payments, there are some simple ways to improve debtor performance. Small businesses should communicate frequently with clients, bill immediately, incentivize early payments, and prioritize collections.
Use Multiple Communication Channels
Use more than one communication channel to reach your debtors. Email is fast and easy but isn’t without its problems. Your debtor may not notice your email, or it could get filtered out as spam. You should also employ other methods of communication like notifying debtors over the phone or sending out certified letters.
Bill Clients Immediately
Businesses often wait for a certain day of the month to send out invoices, which puts an artificial delay on the time for collection. Instead, small business owners should strive to invoice customers the same day the work is completed. This provides clients with the longest lead time to settle a bill.
Incentivize Early Payments
Small business owners that offer incentives to debtors are more likely to receive timely or even early payments. Incentives include discounts for paying early, which encourages a business to make a payment before the due date. You may also establish late fees, which discourages a business from waiting too long and ensures that accounts are settled on time.
If and when a customer is late on payments, it’s important to ensure that adequate resources are devoted to collections. The customer may have forgotten or lacks the finances to pay you. In either case, a prompt reminder is important. Furthermore, small business owners should pay close attention to these signals to avoid extending additional credit to these customers.
Account debtors are an important part of the factoring process in that they are the party obligated to pay the invoices a business is factoring. The dependability of a business’s account debtors in paying off their debts is a key consideration for factoring companies. A business with account debtors that have a good credit history will have little to no trouble getting approved for a factoring facility.