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Article: Invoice Factoring – An Easy Way To Get Working Capital

Every day, business owners hit a “wall” that prevents them from growing their business or, at least, severely limits the speed at which they can grow their companies. To many small companies, the wall may seem insurmountable, causing them to give up. That wall is their lack of available working capital.

In this article, we discuss the most common source of this insidious problem: allowing customers to pay invoices in 30 to 60 days. This practice is commonly known as “extending terms.”

Why do customers ask for net 30 day terms?

Nothing causes business owners to cringe more than hearing a customer say, “We’ll be happy to buy from you. However, we pay our invoices on net 60 days. Can you offer terms?”

Large clients often like to pay invoices slowly because it improves their cash flow. It’s like getting an interest-free loan from a vendor, which, in this case, is you.

They expect you to to go through the challenges and expenses of delivering your product or service on time and then waiting two months to get paid. In the meantime, you still need money to operate your company.

30 day payment terms = cash flow problems

Before long, your company has a lot of money tied in slow-paying accounts receivable. It’s not unusual for small companies to have more money tied in slow-paying invoices than actual cash in the bank. And when their cash flow hits the breaking point, they hit the wall – and at full speed if they were not watching their finances carefully.

They may find that they can no longer supply new products until old invoices pay. The company is now stuck in neutral. Sometimes it’s even worse: it starts going in reverse. The business may cease operating completely and start turning clients away until old invoices pay. Payroll is missed. Key suppliers are not paid. Unless this problem is fixed quickly, the business risks failure.

Your two options

If you hit the wall, you usually have two options. You can step on the brakes and stop growing your business, which means your competition gets the contracts and grows. Or you blast through the wall that is holding you back by using financing. Our solutions, invoice factoring specifically, can help you do just that.

Your most important asset – your invoices!

Companies that hit the working capital wall may not realize that they have an asset that can be turned into immediate funds: their unpaid accounts receivable from creditworthy customers.

Here’s an example. Let’s assume you have a $30,000 invoice that is payable in 50 days by a reputable company, like Amazon.com. You know Amazon.com is a solid company and will pay that invoice. Actually, that invoice is almost just as good as cash. And while you can’t use the actual invoice to pay bills, you can finance it using a solution called factoring.

Financing your invoices

Factoring enables you to turn slow-paying accounts receivable – from solid customers – into immediate cash. This solution provides immediate funds that you can use to run your business.

Basically, you trade your invoice, which is “almost as good as cash,” for actual cash, giving you a reliable source of funding that provides your company with working capital.

You can finance invoices on an ongoing basis, as long as you have solid customers and good invoices. Your facility size is limited only by how much you can sell to good customers – giving you unparalleled flexibility to operate and grow your company.

One important detail about factoring is that it doesn’t generate debt. The factor does not loan you money for your invoices; rather, it buys them outright from you at a small discount. Since factoring invoices is not a loan, qualifying for it is easy and your financial statements look cleaner. You just need a well-run business and great customers.

Will this work for you?

Receivables factoring is a great resource for companies whose customers have good credit, even if they pay slowly. Also, to ensure that the program works well with your business, you should have profit margins of at least 15%. However, higher margins of 25% – 30% are obviously more desirable.

The solution works remarkably well for businesses that have hit the cash flow wall and are turning away new clients because they lack money and cannot offer terms. When used in these situations, factoring almost always allows you to grow your company immediately and will more than pay for itself.

This solution works well in most industries. Some very successful staffing companies, trucking companies, IT consultancies, construction firms, manufacturers, and service providers have used this type of financing to dramatically grow their businesses.

A sample invoice factoring transaction

Let’s take a look at a sample transaction to help you better understand how factoring works. Let’s say that your company, called My Small Business Inc., sells its products to a large client called Super Client.

  • My Small Business Inc. delivers its products to Super Client.
  • My Small Business invoices Super Client and sends a copy of the invoice to the factor.
  • The factor receives the invoice and advances funds to My Small Business Inc.
  • My Small Business Inc. now has the funds to operate.
  • The finance company holds the invoice until Super Client pays, settling the transaction.

As you can see, factoring invoices is a fairly straightforward tool that allows business owners to capitalize on their most precious asset: slow invoices from solid customers.

If you would like to learn more about actual transaction structure, please read “How do factoring companies buy accounts receivable?

Flexibility

One important advantage of factoring is that the line can grow with your revenues, as long as your sales are to qualified clients. This feature allows you to grow our company while minimizing the financial problems of offering terms to commercial clients.

A stepping-stone to cheaper financing

While factoring is a great financing tool, many companies use it as a stepping-stone to get cheaper financing from banks or other lending institutions. Companies can start using receivables financing during the initial growth phase, when they can’t qualify for bank funding. Once the company has grown and has a more stable financial situation, they can migrate to a cheaper bank financing line.

Would you like a quote?

We are a leading factoring company and can provide you with high advances and low rates.  You can get an instant online quote, or speak to an expert by calling (877) 300 3258.

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