In many industries, an important cash flow strategy is to take advantage of what are often referred to as early pay discounts, or “2/10, net-30 discounts.” Such discounts allow companies to subtract 2 percent (and sometimes more) from the invoice amount if it is paid within 10 days instead of the normal 30.These discounts can really add up, especially for companies with thin profit margins. The challenge for many companies, however, is managing their cash flow system in a way that enables them to take advantage of these discounts on a regular basis.

Meeting the Cash Flow Challenge

The president of a California company discovered the benefits of taking discounts when he started his business seven years ago. Unfortunately, it didn’t take him long to discover the huge cash flow challenges inherent in paying vendors early in a manufacturing business like his.

His business manufactures custom covers for restaurant menus, hotel entertainment directories, movie studio press kits and similar applications, primarily for customers in Las Vegas and Hawaii. “I have always tried to take advantage of any discounts offered to me,” he explains. “It is has become very important to my profitability.”

His solution to the cash flow challenges inherent in taking discounts was factoring. In fact, the owner says he’s been using receivables factoring services since he started the company. Doing so enables him to get paid within 24 hours, instead of up to 60 days or longer. “I work the cost of factoring service into the price I charge my customers, so I’m not losing any money,” he says.

“Factoring is so well integrated into my business model that it’s seamless,” he continues. “It gives me much more flexibility and predictability. I can’t imagine going back to a system where I have to wait for accounts receivable to come in the mail.”

The owner keeps his overhead to a minimum and manages his finances on a week-to-week basis. “This is the easiest way for me to control cash flow management and make sure we stay profitable,” he says. The company generates about $2.2 million in annual accounts receivable, with a fluctuating number of employees based on the volume of work at any given time.

More Than a Bridge

While many business people view factoring services simply as a “bridge” to help them through a temporary cash flow crunch, this company illustrates that it can also be used to build strong relationships with suppliers. After all, this is a short term loan with no interest, no collateral and no personal guarantees. It also ensures a high level of response and service from the suppliers. What could be better than that?

In short, businesses should think of factoring services as a multi-faceted cash flow funding tool—not just a one-time quick fix.