Getting a Handle on Collections: Financing vs. Workflow Automation?

Eugene Vyborov

Working capital is oxygen to the nation’s 200,000 middle-market businesses, vital to their survival, competitiveness and growth. But managing working capital efficiently is all too often a challenge.

Consider: On average it takes middle-market companies 60 days to collect on invoices—twice as long as the waiting period for the Fortune 1000. In some industries, such as digital media and healthcare equipment and supplies, payments can drag out even longer, to 90, 100 or even 120 days.

There are two ways to manage working capital through accounts receivables (A/R) optimization. One is A/R financing. The second, more cost-effective, method is by streamlining collections through workflow automation.

Extracting capital from receivables

For companies caught in the limbo between invoicing and remittance, A/R financing can provide a means of quickly generating needed working capital. It’s an approach that can take either of two forms: factoring or invoice financing.

Factoring is the non-recourse sale of accounts receivables—and the transfer of credit and collections risk—to a lender. Typically, the accounts are sold at face value, less a commission charge of 2 to 4% above prime.

With invoice financing, the company uses its accounts receivables to collateralize a loan equal to up to 85% of the accounts’ face value. Ownership of the accounts stays with the borrower, along with the risks and administrative costs related to collections.

Playing the waiting game

A/R financing can provide a company with the capital it needs when it needs it. But, to borrow a disclaimer from late-night TV discount promos, conditions apply.

For one thing, neither factoring nor financing comes cheap: After paying fees, service charges and, possibly, interest, you end up netting less than the total amount of your outstanding invoices. Moreover, if you choose to sell your accounts, your customers may not take kindly to receiving invoices and late-payment notices from a creditor they don’t know.

The case for workflow automation

Workflow automation solutions like YayPay avoid these traps and deliver a more effective and cost-efficient solution. Rather than wait until after an invoice has been sent and payment delayed, YayPay addresses collections pre-emptively, providing CFOs and accounting staff with a dashboard that shows all accounts receivable indicators in precise detail. Think of it as an intelligent CRM system designed specifically for the A/R function.

Workflow automation enables the A/R team to streamline manual tasks such as email reminders and focus instead on high-value activities such as dispute resolution. Studies have shown that YayPay’s workflow automation tools can speed collections—measured in Days Sales Outstanding—by up to 20%, and reduce related costs by over 30%.

A higher ROI

Make no mistake: Factoring and invoice financing have proven useful time and again in helping middle-market companies access working capital while waiting for payment on invoices. But workflow automation yields a measurably higher ROI, enabling companies to shorten payment cycles, retain the full value of their receivables and gain greater control over the collections process—without compromising customer relationships.

Eugene Vyborov
About the Author

Eugene is the CTO and co-founder of YayPay, specializing in building enterprise applications for the financial industry. He is responsible for YayPay’s product delivery, strategic technology vision, and core product architecture. Previously, Eugene has founded two technology businesses, A2A and WebiNerds, and was Lead Technical Associate at TechStars Boston in 2016. He has a master’s degree in Computer Science from Dnipro National University, Ukraine.

Read more articles by Eugene Vyborov