Financing Your Business With Receivables Factoring

Companies that work with commercial and government clients face a common financial challenge. Their clients usually pay their invoices in 30 to 60 days. These slow payments often lead to cash flow problems. This article provides three tactics that you should use before considering financing. We cover:

  1. Good clients with slow payments
  2. Fixing invoicing and collections
  3. Building a cash reserve
  4. Offering early payment discounts
  5. How receivables factoring works

Good clients with slow payments

Working with commercial and government clients has financial advantages. These clients often place large orders and can become a source of recurring revenues. However, one common problem affects companies that work with these types of clients. Commercial and government clients usually pay slowly.

Commercial clients often insist on getting net-30 day terms as a condition of working with them. This clause is usually non-negotiable. Furthermore, larger companies often demand longer payment terms than smaller, lesser-known brands. They can ask for net-45, net-60, or even net-90 day terms.

Clients ask for extended payment terms because it helps their cash flow. They get to use your products and services free of charge for a few weeks. Meanwhile, small and growing companies have to wait for payment and cover expenses using their cash reserves.

There are a couple of things you can do to solve this problem. The best strategy is to use a methodical approach:

  1. Examine your invoicing practices. Are they working well?
  2. Consider offering early payment discounts
  3. Do you have a cash reserve?
  4. Consider receivables factoring

How are your invoicing and collections?

Clients pay slowly, but they aren’t always to blame for slow payments. Many problems originate in the small company’s own invoicing and collections process. This problem is fairly common and has a simple solution. Ensure that your invoicing and collections process is working correctly. The process should:

  • Take advantage of commercial credit reports
  • Use well-written contracts
  • Use delivery acceptance letters
  • Send invoices promptly
  • Verify invoices were received by the client
  • Follow up in a timely and professional manner

This process helps improve collections from slow-paying clients. You can find a detailed description here.

Early payment discounts

If your invoicing and collections are working well, consider offering early payment discounts. Early payment discounts provide a financial incentive for clients to pay their invoices quickly. Most companies offer a 2% discount if the client pays in 10 days or less. However, the discount is negotiable so try to arrange the lowest discount your client will consider. Companies that don’t take the discount must pay the total invoice amount on their usual terms.

Small businesses sometimes offer these discounts to the slowest-paying clients. This strategy often backfires. Instead, offer discounts to your good clients who pay slowly. They will appreciate the discount while you enjoy the improved cash flow.

The importance of a cash reserve

Cash reserves are a good tool to minimize financial problems from slow-paying invoices. A cash reserve acts as a financial buffer that allows you to pay expenses while waiting for clients to pay. A good invoicing process coupled with a cash reserve can improve your financial stability substantially.

Building a reserve is simple, but it requires discipline. Save a small percentage of your monthly profits and put them in a special bank account. Do this until you build a reserve that allows you to pay expenses for a month or two. Use the reserve only to pay company expenses and replenish it as soon as you can.

How does accounts receivable factoring work?

If the previous options don’t fix your cash flow, consider factoring your slow-paying invoices. Receivables factoring provides your company with immediate funds. It improves your cash flow quickly and enables you to pay company expenses.

Factoring companies finance your invoices in two installments. The factoring company deposits the first installment in your bank account once you submit invoices from approved clients. This installment is commonly referred to as the advance.

The second installment, less a fee, is deposited in your bank account once your client pays their invoice. This installment payment settles the transaction. Learn more about accounts receivable factoring.

a) Types of factoring

There are two types of factoring programs: recourse and non-recourse plans. Most factors usually offer one of the factoring programs, though some can offer both. The difference between the recourse and non-recourse plans lies in who absorbs the loss if your client defaults on a payment.

In a recourse plan, the factor has the option to demand payment from you if the client does not pay the invoice. In a non-recourse factoring plan, the factor absorbs the loss if your client does not pay due to bankruptcy (e.g., insolvency). Neither factoring type is inherently better than the other. They each have advantages and disadvantages.

Keep in mind that no factoring plan – resource or non-recourse – absorbs the loss if your client disputes an invoice. Those invoices are always sent back to clients.

b) Does your company qualify?

Qualifying for factoring is much easier than qualifying for other financing products. This is because factoring uses a different financial structure.

Most factoring companies do not offer loans against receivables. Instead, the factoring company buys the receivable from your company. Using this structure changes the risk profile of the transaction and makes factoring easier to obtain.

To qualify for factoring, your company must have:

  • Creditworthy commercial clients
  • A good invoicing process
  • No encumbrances against your receivables
  • No ongoing bankruptcies

For more information, learn more about the qualification criteria for a plan.

c) Advantages of receivables factoring

Using a receivables factoring line has a number of advantages over other solutions. Some advantages include:

  • Easier to obtain
  • Provides stable cash flow
  • Does not depend on clients sending quick-payments
  • Works in most industries
  • Dynamic financing that grows with your sales
  • Lets you offer net-30 terms to clients
  • Can be used as a short-term solutions
  • Available to small businesses

Conclusion

A methodical approach is the best way to solve your cash flow problems. The best approach is to start by improving your invoicing and collections practices. Then, work on adding early payment discounts and building a cash reserve.

However, if your in-house efforts do not fix the problem, consider using financing. Receivables factoring is a tool that is specifically designed to solve cash flow problems from slow-paying clients. It’s easier to obtain than other solutions and can grow as your company’s sales increase. This flexibility makes it an ideal solution for small and growing companies.

Get a factoring quote

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