As an asset based lender, the biggest, single statistic we look at relative to an accounts receivable (A/R) loan is how the business’ customers are paying their invoices. That’s what referred to as A/R Turn and it’s important that business owners keep a close eye on it, too.
If the Turn rate is increasing, that means it’s taking longer for customers to pay which is not good for the business. As A/R Turn never lies, if it’s changing in any way (increasing or decreasing), something’s going on and business owners need to understand what that is.
Typically, companies offer 30-day terms and expect payment within 45 days. When payments come in later than 45 days, that’s a problem and a probable reason for it could be as simple as lack of attention – business owners simply not asking their customers to pay. And why is that? Sometimes owners just don’t fully understand the impact slow payers have on the business or they’re afraid to confront customers for fear of losing business.
Getting customers to pay within 45 days is an easier process than waiting until after 45 days. When you make a collection call before payment is due (15 to 20 days after the invoice is issued), you don’t need to ask for payment; instead, you can take a more positive approach. Make the call service oriented by asking such questions as, “Did you receive the merchandise?” and “Was everything OK with your order?” Once you know your customer is satisfied with the order, end the call with, “That’s great. I’m sure you’ve received the invoice so I’ll look for your payment in the next few days.”
There are big benefits to businesses that do this process routinely and do it well including increased cash flow and decreasing financing costs. And, when the A/R is performing well, the business looks better to lenders.
To see how well your A/R is turning and the impact various Turn rates have on your yearly financing costs, we invite you to try the easy-to-use calculator we have on our website at https://www.celticcapital.com/accounts-receivable-calculator.
About Celtic Capital
Companies looking for working capital to cover operating expenses, fund growth, increase buying power and take advantage of vendor discounts and rebates turn to Celtic Capital. With an appetite for the more complex transactions, Celtic Capital has a history of success in crafting creative, flexible asset based financing solutions from $500,000 to $5 million with no financial covenants.
As an independent lender, working with companies nationwide, Celtic Capital is willing and able to alter price and deal structure and expand lines of credit to handle its clients’ increased revenues; and when cash flow is an issue, will look toward providing an inventory facility to help offset lost cash flow.