Tag: Trade Receivables Financing

Your Pricing Strategy Affects Trade Receivables Financing

If you’re in need of some quick cash infusion for your own business, you may want to think about accounts receivable factoring instead of applying for a bank loan. Factoring is a form of trade receivables financing. You get an advance on the value of your invoices, which you can then use right away as working capital. Small business factoring companies can offer you as much as 80% of the value of an invoice, and then charge you a very small percentage as fee for the advance.

Since your funding relies on the value of your accounts receivable, you really need to make sure that you’re pricing your products and services correctly. But how do you determine the right price for goods and services? Here are some pricing strategies you may want to think about.

Cost-Based Pricing

In any business, you earn money when you receive more money than what you spend. This is also the very essence of cost-based pricing. You take note of how much you spend in manufacturing a product or providing a service, and then you add a nice profit margin for yourself when you set a price for what you offer.

The key here is to be very aware of how much you actually spend on costs. Maybe you spent money on research and development. You also have to take note of various ordinary expenses such as rent and utilities, as well as supplies and equipment you need for your work. Payroll has to be considered too. Even after you’ve manufactured your product, you will also have to consider just how much money you will spend on advertising to promote that product.

This is a great way to price things—if you offer a product or service that the consumer base wants.

Competition-Based or Industry Standard Pricing

Here you look at the prices normally charged by your competitors and then you determine your own prices based on those figures. Normally this means you price your products lower so that you can brag that you offer more affordable goods and products. This is actually a very easy way to get the attention of many prospective consumers.

The problem here is that you still need to think about your own costs so you don’t end up losing for each sale. If you’re spending a total of $1,000 to create a single doodad, then offering it for $9o0 means you’re selling it at a loss. Some large corporations can absorb this kind of loss because they just want to grab market share and make a brand more popular, but for a small business this can be a problem.

Customer-Based Pricing

When there’s a great demand for a product, you can raise prices in order to gain more profit. There may even be a boost in your brand’s image. Many people see the price tag as proof of quality. If they see that something is expensive, then they automatically think that it must be good. Many exclusive universities set their tuition this way, as a way to discourage more than 75% of their applicants. Luxury bags use this type of pricing too.

Whatever pricing strategy you use, just keep in mind that it will affect your trade receivables financing as well!

Trade Receivables Financing Options

Numerous small and mid-sized businesses today are in need of financing, and banks aren’t exactly the best option. With banks, the loan application process can take a very long time. In addition, banks require collateral in the form of real estate or equipment. But with trade receivables financing, many SMEs have found a much more convenient way to increase their working capital and growth financing.

What are Trade Receivables?

In this type of financing, you can get the funding you need by using your trade receivables, which are essentially the commercial debts resulting from the sale of goods and services between your business and other companies.

These sometimes prove an attractive asset for your lender for several reasons. These receivables are self-liquidating, unlike other assets which may be more difficult to convert into cash. They are also generally short-dated, so lenders don’t have to wait long to get their money back. And finally, the volume of receivables can lead to revolving financing, while the range of receivables means you have a variety of ways to make use of them to get the money you need.

Types of Trade Receivables Financing

There are several kinds of trade receivables financing. The two most popular and well-known options are:

  • Factoring. This method involves a sale of the receivable at a discount, so it is not technically a loan. The way it works is simple. Usually, when you make a sale to another company, you deliver the goods and in return you issue an invoice which determines the length of time you need to wait before you will receive payment.

But with factoring, you don’t wait at all. The factor advances you about 80% of the value of the invoice immediately, so you can put that money to good use right away. Once your customer settles the account and pays for the goods in full, the factor then sends you the rest of your money, less the fees charged by the factor.

Factoring also has some variations as well. For example, you are usually obligated to pay back the advance if your customer doesn’t pay you because of bankruptcy. But in non-recourse factoring, that kind of nonpayment is a risk that the factor deals with, and you have no obligation at all in case of non-payment.

  • Invoice discounting. In many ways, invoice discounting is very similar to factoring. The main difference is in the collection process. In factoring, the factor usually takes over the collection process. They’re the ones who contact your customers and get the payment. This is an advantage to you if you don’t want to set up a collections department for your own company.

In invoice factoring, you’re still in charge of the collection process. This is an important point for some businesses where the relationships with customer-companies are extremely sensitive or delicate. You still deal with the customers directly and collect the payments yourself.

With trade receivables financing, the amount of funding you get depends on the quantity and quality of the receivables. Your own credit is not as important as the credit of your customers, so if you sell to established firms then you’re more likely to get the financing. And the more sales and invoices you generate, the more your funding grows to meet your needs.