How to Improve Your Cash Flow By Factoring Receivables

Few things are more frustrating to a business owner than turning away sales because they cannot afford to offer terms. Simply put, many large corporations demand payment terms as a condition of doing business. They are happy to buy from you, as long as you can wait 30, 45, or even 60 days for payment. The problem is that many small companies can’t afford to offer terms because they lack the financial resources.

Slow payments create cash flow problems

Unless the customer pays quickly, small companies risk not being able to replenish inventory, repair and buy equipment, or meet payroll. So when a large sale that requires terms arrives, owners get nervous. They don’t want to lose the sale, but they don’t want working capital problems. This is a serious dilemma.

Although the problem is simple, fixing it is not always easy. There are three options:

  1. You can turn away the sale and avoid growth
  2. You can ask clients to pay quickly
  3. You can use business financing to improve your cash flow

Options #1 and #2

For most business owners, option #1 is not even an alternative. Turning away a sale is not acceptable because that customer will never come back. A better option is to ask clients to pay quickly. This approach can actually work at times, especially if you offer an early payment discount.

However, quick payments are never reliable because customers can always change their minds and pay slowly. The better alternative is option #3.

Bank financing may not be the solution

Many businesses make the critical mistake of trying to fix this cash flow problem using a business loan. While a loan can provide some relief, it is often not the right tool to fix a cash flow problem because term loans provide a fixed amount that is repaid over a period of time.

A line of credit may be a better solution, as it can be used to cover gaps in your cash flow. But revolving lines of credit have two problems. First, they have set maximums. Banks are not likely to increase your line quickly – unless your business already has a track record. Second, and perhaps more importantly, lines of credit are difficult to get. Few small business owners have the collateral, or track record, to qualify for a line of credit.

Finance your receivables – improve working capital

If your biggest problem is that you cannot afford to wait up to 30 days to get paid by clients, receivables factoring may offer a better solution than other business financing tools. It goes to the heart of this problem and solves it effectively.

A factoring transaction finances your invoices from creditworthy customers. It provides the funding for the invoice upfront, which improves your working capital and provides the money you need to pay expenses.The transaction closes when your customer pays.

A flexible solution

The main difference between factoring and other solutions is that most factoring companies do not provide loans or lines of credit; rather, they buy your invoices for an immediate payment. And factors are willing to buy as many invoices as you can sell, provided the invoices are:

  1. For completed services or received products
  2. From creditworthy companies
  3. Free of liens and encumbrances
As you can see, the line is flexible can be used, or increased, based on your company’s needs.

How does the solution work?

Receivables are often purchased using a two-payment model. The first payment is the advance and the second payment is the rebate. The transaction is structured as follows:
  1. The finance company checks your customer’s credit.
  2. You send an invoice for completed services (or delivered goods) to your client.
  3. The factoring company wires the advance. This amount averages 85% of the value of the invoice.
  4. Your customer pays after 30 to 60 days.
  5. The finance company wires the rebate. This amount averages 15% of the value of the invoice, less the discount fee.
Although many companies use this solution to fix broken cash flows, the solution is best used as a growth tool. Receivables factoring allows you to offer terms to customers, enabling you to take on larger sales without having to worry about slow payments. This advantage makes receivables factoring an attractive alternative for fast-growing companies that have cash flow problems because customers demand payment terms.

Get a quote

We are a leading receivables factoring company and can provide you with competitive terms. For more information, get an online receivables factoring quote, or call us at (877) 300 3258.