Resources | Working Capital | February 2, 2023

How an Early Payment Program Can Save You Money on Your Factoring Agreement

Integrating an early payment program with your factoring agreement can minimize costs and fuel an even bigger cash flow boost than factoring alone.

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Integrating an early payment program with your factoring agreement can minimize costs and fuel an even bigger cash flow boost than factoring alone.

As a small to mid-sized business, you most likely wait for 30, 60 or 90 days — possibly even longer — to receive invoice payments from your customers. Extended payment periods can leave you without the working capital needed to sustain and grow your business, even when sales are high. 

If this sounds familiar, you might have partnered with a factoring company to help increase cash flow. Alternative cash flow solutions such as early payment programs can be combined with factoring to reduce some of the fees and interest charged by factors. Unfortunately, many businesses are under the impression that they can’t take advantage of such programs once they enter into a factoring agreement.

This is simply not true. Even if you factor your invoices, you can most likely still leverage early payment with customers, saving you money while increasing cash flow. What’s the difference between invoice factoring and early payment discounts, and what are your options if you’ve signed a factoring agreement?

What is invoice factoring?

Invoice factoring is a financing agreement that helps you get paid sooner on outstanding invoices. Factoring involves a third-party factoring company, known as a “factor,” that buys your outstanding invoices for a portion of the total amount owed (typically 70% to 90%). When your customer pays the factor in full, the factor pays you the remaining balance minus factoring fees (usually around 1% to 5%). Factors charge part of their fees based on the length of time the invoice is outstanding.

For example, imagine that you just issued a customer invoice totaling $100,000. The factor buys the invoice, advancing 80% of the total amount. You receive $80,000 from the factor within a few days, giving you a much-needed cash flow boost. The factor then collects a $100,000 payment directly from your customer according to the original payment term of 60 days.

In this hypothetical scenario, the factor charges a 2% fee for the first 30 days ($2,000) plus a 1% fee ($1,000) for each additional 10-day period. This gives you an additional $15,000 after fees once the customer pays the factor. In total, early payment cost you $5,000, or 5% of the invoice value:

chart showing factoring fees

What are early payment discounts?

Alternatively, early payment discounts allow you to fund faster payments rather than a third-party factor. With early payment discounts, your customers pay you sooner than your agreed terms in exchange for a small invoice discount. Some early payment discounts are calculated statically, giving customers a fixed discount if they pay within a prescribed period — such as a 2% discount if they pay within 10 days of receiving the invoice. 

More flexible early payment agreements use a dynamic approach. This allows customers to pay at any time before the agreed payment term, adjusting the discount based on timing: the earlier the payment, the bigger the discount. C2FO’s Early Payment program takes this a step further, using supply and demand to determine discount costs in addition to timing. This often results in a more cost-effective discount rate and terms that benefit both you and your customer.

While early payment programs vary, here’s how it works with C2FO:

  1. You review outstanding invoices, which are automatically uploaded by customers that implement C2FO’s Early Payment program, on the C2FO platform.

  2. You decide which invoices to discount for early payment and set your desired discount rate.

  3. If your offer is accepted, you receive early payment from the customer, minus the discount, in as little as 24 hours.

How combining factoring and early payment discounts can benefit your business

You can leverage an early payment program such as C2FO’s even if you already partner with a factor. In this case, the factor still advances you cash, but if your customer agrees on an early payment offer with you, the factor receives payment sooner. Depending on your factoring agreement, this strategy can usually save you money and increase your cash flow more than using factoring alone. 

How? Remember that factors consider the length of time that invoices remain outstanding as part of their fee structure. These fees are almost always more expensive than the discounts your customers will accept to pay invoices earlier. If a customer accepts your early payment offer and then pays the factor early, the invoice may only be outstanding for a day or two, saving you additional factoring fees. 

Here’s how fees compare when revisiting the previous invoice factoring example, which uses a $100,000 invoice and a 60-day payment term:

chart comparing only factoring with factoring and early payment combined

When blending solutions, you would save $3,000 in additional factoring fees in exchange for the $1,000 cost of an invoice discount, a savings of $2,000. Since the factor is paid by your customer early (in this example, within 48 hours), you don’t have to wait out the invoice term to get the remaining cash. Instead, you receive the full $100,000 minus the $3,000 early payment cost for an even bigger cash flow injection.

To realize these benefits, the first step is to understand your factoring agreement terms, particularly the fee structure, and do the math. For example, you may be more likely to save money if your factor charges fees weekly rather than monthly. If the discount rate is lower than the factoring fees associated with early payment, consider combining factoring with early payment programs offered by your customers.

Transitioning from a factor to an early payment program

If you get minimal or no cost savings from combining both strategies, there are several reasons why switching from factoring to early payment discounts may be preferable for your small to mid-sized business. 

First, using an early payment program alone is often more cost-effective than factoring because there are no additional fees beyond the invoice discount cost. Second, traditional factors often have hidden fees, complex agreements and inefficient processes. Early payment programs also allow you to continue owning your customer relationships and give you more control over early payment rates and timelines.

If you were to accelerate a $100,000 invoice with a 60-day payment term — without using any factoring — here’s how the fees might add up:

chart showing early payment discount

The bottom line

Whether you plan to combine early payment discounts with factoring or switch strategies altogether, it’s helpful to know if any of your customers already participate in an early payment program. Click here to find out if your customers support early payment discounts through C2FO’s platform so you can get started today.

*Discount rate offered for 60 days, based on the average C2FO early payment offer. Costs may vary with other early payment options.

This article originally published November 2018, and was updated February 2023.

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