Waiting 30, 45, or even 60 days to get an invoice paid is a challenge for many business owners. Small companies often have to wait for payment because their commercial sales are made on credit. This type of trade credit is commonly known as “payment terms.”
Companies must offer payment terms because their clients demand them. Unfortunately, offering terms can also cause cash flow problems, especially to small businesses that don’t have an emergency fund. This creates a dilemma for business owners.
This article discusses how to offer payment terms while avoiding the cash flow problems that come from waiting to get paid. We cover:
- What are payment terms?
- The risks of net-30 accounts
- Which clients should get payment terms?
- How to use factoring to offer payment terms
- Advantages of factoring
- Who qualifies for factoring?
- How to find the right factor?
1. What are payment terms?
Payment terms are the contractual conditions that determine when a client will pay their invoice. Terms commonly allow the client to pay in 30 to 90 days. Think of payment terms as a form of short-term trade credit.
Invoices that have payment terms usually have a notice on them. The format of the notice is as follows: “Due in Net N Days,” where N is the number of days. Common terms include 30, 45, 60, and 90 days. They are usually marked as follows:
- Net 30 Days
- Net 45 Days
- Net 60 Days
- Net 90 Days
Learn more about offering net payment terms.
2. The risks of net-30 accounts
While getting terms is great for your clients, it exposes you to some risks. A common problem is that companies that offer terms tend to experience cash flow shortages. This problem happens because the companies often have to pay their expenses before getting paid by the client. This situation forces companies to rely on cash reserves while waiting for payment. Cash flow problems happen when reserves run low.
Another problem is the increased risk of bad debt. Bad debt results from clients who receive your product/service but don’t pay their invoice. This situation happens when clients have their own financial problems or simply refuse to pay an invoice. Obviously, bad debt hurts your business.
3. Which clients should get payment terms?
You should offer credit terms only to clients with a good track record of paying invoices and the financial capacity to pay you back. The best way to determine if a client will pay their invoice on time is to run a business credit report on them. These reports are great business tools that help you determine which clients deserve to get payment terms.
Using commercial credit reports helps minimize slow payments and bad debt. However, one important issue is left open. What do you do if you can’t afford to offer terms to clients who have good credit? The answer: consider financing your invoices.
4. Invoice financing enables you to offer payment terms
Most startups and growing companies have a common problem. They can’t afford to offer payment terms to their good clients. This difficult situation leaves small business owners with two choices: making the sale and risking financial problems or turning the sale away and losing business. Neither outcome is good.
You can overcome this problem by financing your receivables using invoice factoring. Factoring improves your cash flow and allows you to offer payment terms to your clients. The solution is easier to obtain than most financial products and is available to startups and small businesses.
Most factoring transactions finance your invoices in two installments. The first installment is deposited into your bank account shortly after you submit your invoices to the factoring company. The second installment, less the factoring fee, is deposited to your account once your clients pay their invoices in full (on their usual terms). This second payment settles the transaction. Learn more about by reading “How Does Factoring Work?
5. Advantages of factoring
Factoring has several advantages over other solutions. They include:
- Improves your cash flow
- Allows you offer payment terms
- Reduces your bad debt
- Relatively easy to obtain
- Financing line grows with your business
- Provides ongoing financing
6. Who qualifies for factoring?
Qualifying for factoring is easier than obtaining other forms of business financing. It’s available to startups, small companies, and growing companies of any size. To qualify, a company must have:
- Good invoicing practices
- Creditworthy clients
- Experienced owners
- Good profit potential
7. How to find the right factoring company?
Choosing the right factor for your company is important. You want to partner with a company that has a good reputation and experience in your industry. Consider asking these questions to all prospective factoring companies:
- What type of factoring do they offer?
- In what industries do they specialize?
- How long have they been in business?
- How quickly can they set up your account?
- Is their service good? (ask for references)
- Do they have minimums?
Learn more about choosing the right factoring company.
Offering payment terms to commercial clients can be challenging, especially for small and growing businesses. Companies often run into cash flow problems because they cannot afford to wait for their clients to pay. They need to get paid quickly so they can pay their own vendors and employees.
Companies can often fix their financial problems due to slow payments by factoring their invoices. Factoring provides companies with an advance on their slow-paying invoices. This solution allows them to cover their expenses and provides them with a platform to take on new business and grow the company.
Get more information
Looking for a factoring quote? We provide competitively priced factoring plans. For information, call (877) 300 3258.