06.25.2024 | Posted by Erik

Which Is the Right AR Management Model for Your Apparel Business? Considering Outsourced AR Management or Factoring

The retail and apparel industry is no stranger to volatility. Supply chain disruptions, inventory challenges, and the ever-growing competition from global eCommerce have significantly impacted cash flow. Apparel brands must be strategic about how they manage their accounts receivable (AR) processes to safeguard cash flow at all costs. 

One decision many companies face is the choice between traditional factoring and outsourced AR management. Both models offer advantages and drawbacks, and it’s up to each company’s leaders to determine which model is the right fit for your brand’s needs.  pros and cons between traditional factoring and outsourced AR management

This article will delve into both solutions, exploring the pros and cons of each and providing considerations for choosing an appropriate AR management model for your apparel business. 

Factoring as an AR Solution for Apparel Companies 

Factoring involves selling your receivables to a third party, called a factor, at a discount, in exchange for up-front cash. This can be particularly beneficial for apparel companies in the startup phase or those dealing with seasonal retail. For example, brands with swimsuit lines that need to fund production ahead of peak sales seasons may benefit from the immediate access to cash during off-season. 

Pros of Factoring: 

  • Quick access to cash, which is crucial for managing production and other immediate expenses. 
  • The factor assumes the credit risk on credit-approved accounts, ensuring that you get paid even if your customers default. 

Cons of Factoring: 

  • Factoring can be expensive, with fees often ranging from 1% to 5% of the invoice value, plus additional charges. 
  • Factoring has a rigorous credit approval process and factors can be very conservative about which companies they approve. 
  • It can potentially harm customer relationships, as factors might pursue collections in a more aggressive manner. 
  • A risk of losing control over the AR process, as the factor takes over.

Best for: Factoring tends to be better suited for smaller or newer companies needing immediate cash flow solutions (as long as their margins allow for higher-cost solutions), and brands dealing with high seasonality in their sales. 

Outsourced AR Management for Apparel Companies 

Outsourced AR management provided by vendors like Axim involves hiring a third-party firm to handle your AR processes, including invoicing, collections, daily order approvals, and credit approval and investigations. This model can be more cost-effective and flexible compared to factoring. 

Pros of Outsourced AR Management: 

  • Cost savings & Fixed rate: Often less expensive than factoring due to lower fees and a more tailored approach. Outsourced AR firms typically charge a flat monthly fee based on the time it will take them to work your accounts, whereas factors usually base fees on a percentage of invoice amounts—which can be much more costly. 
  • Enhanced customer service: Firms like Axim offer high customer service levels, always calling in the customer’s name and putting the customer relationship first, which helps ensure higher customer retention and satisfaction. 
  • Control and transparency: You maintain full control over your AR process and have access to detailed reports and analytics. 

 Cons of Outsourced AR Management: 

  • Lending: An outsourced AR firm does not lend money or buy receivables, nor do they credit guarantee the AR. The funding must come from an alternate source. 
  • Onboarding and transition: There is an initial setup period while the provider familiarizes themselves with your processes. 
  • Piecemeal approach: You may need to coordinate with multiple vendors for different services, including a traditional lender or bank, in addition to the outsourced AR firm, unlike the one-stop-shop model of factoring. 

Best for: Outsourced AR management is ideal for mid to large-sized companies, smaller well-funded companies seeking a long-term solution to grow with them, or organizations in a more mature growth stage looking to optimize their AR processes while maintaining strong customer relationships.  

Moving to an Outsourced AR Management Model 

If outsourced AR sounds like a good fit for your apparel company, it may be worth considering Axim. With a database of over 19,635 apparel retail and related companies, Axim has decades of experience in the apparel industry and can quickly integrate with new apparel clients, thanks to extensive A/P contacts, credit information, and payment history. 

Axim currently manages 40,374 invoices for 2,563 customers, and is able to handle large invoice volumes efficiently. The firm’s performance in apparel to date is impeccable, having maintained exceptional aging for one long-time apparel customer with 87.88% current invoices. 

 Axim’s track record showcases success in collecting timely on invoices across customers, with over 80% of invoices paid on time:  

Aging  Percentage of total invoices  Invoice dollar amount 
Current  80.54%  $66,377,494.29 
1-30 days  13.50%  $11,125,445.79 
31-60 days  3.71%  $3,055,144.21 
61-90 days  1.51%  $1,241,810.33 
91+ days  0.74%  $613,636.00 

A Smooth Onboarding Process 

Transitioning to outsourced AR management with Axim is a straightforward, painless process that typically involves:  

  1. An initial assessment of your current AR processes, including a review of your aging and customer list 
  2. Gaining access to your accounting system 
  3. A short series of onboarding calls 

After we get your information set up in our proprietary AR system, we’ll start collecting on your past-due invoices. 

Choosing the Right AR Management Option for Your Company 

 While factoring can offer apparel companies a quick fix for immediate cash flow needs, especially for startups and seasonal businesses, outsourced AR management delivers a more comprehensive, cost-effective, and customer-friendly solution. Companies looking to improve their AR processes and customer relationships will find a reliable partner in Axim for achieving these goals. 

For more information on Axim, call our team at (661) 254-3007 or send us a message.