While working with commercial and government customers has a number of rewards, it also has one very well-known challenge: these clients always demand payment credit terms as a condition of doing business. Therefore, you have to wait up to 60 days before you get paid.
This delay can cause major headaches for small business owners, who often need to get paid sooner to be able to cover business expenses.
A dilemma for small business owners
As a small business owner, you definitely want to compete for and win large purchase orders from corporate and government clients. However, you also want to avoid overextending yourself and taking an order so large that you will not have enough money to run your business after fulfilling it.
The last thing you want to do is create a situation that could lead to financial problems down the line. And yet, this happens every day to business owners across the country.
Build financial reserves
One way to handle this situation is to strengthen your financial reserves by investing additional money in your business directly or through investors. While this strategy works, it ties more of your capital into the business. If you use outside investors, you have to surrender some equity in your company. The problem with giving up equity is that you get – in addition to capital – a business partner. Even “silent” partners can become very vocal when their money is at stake and things don’t go as planned.
Improve your finances with receivables factoring
A better option is to improve your financial position using business financing. While there are various tools available in the marketplace, one tool is specifically designed to address the cash flow problems created by slow-paying clients: receivables factoring.
The biggest financial challenge for many companies is waiting for invoices to pay. So, how does receivables factoring help? This solution provides financing based on your receivables. It reduces the time it takes you to realize the revenue tied in slow-paying invoices and provides funding to run operations. The transaction is relatively simple and is funded through a factoring company.
The factoring company acts as a financial intermediary between your client and your company. First, you invoice your client. The finance company advances funds to your company, using the receivable as collateral. The transaction closes when your client pays in full. Obviously, the finance company gets a fee, also known as a discount, for this service.
Most invoice finance agreements only include invoice financing and do not offer protection against non-payment. If your client does not pay, you still need to make the finance company whole and pay them back. However, there is a form of accounts receivable factoring that offers some protection against bad debts. Here is more information about the non-recourse factoring program.
A conventional transaction is structured as follows:
- You deliver your work or product
- You send an invoice to your client, as usual
- You send a copy of the invoice to the finance company
- The finance company advances 85% (average) of the invoice as a first installment
- Your client pays, after 30 or 60 days
- The factoring company rebates the remaining 15%, less a discount
To learn more, please read “How do factoring companies buy accounts receivable?”
One advantage of this program is that it’s easier to get than most conventional funding solutions because the receivables financing company is usually not lending your company money; rather, they are buying the financial rights to your receivables. Because of this structure, you can sell as many invoices to the finance company as you can generate, as long as:
- Your invoices are for completed services or delivered products
- Your customers have solid commercial credit
- Your invoices are not encumbered by liens, judgments, or loans
- Your company is well managed
This aspect of receivables factoring is an advantage for small and mid-sized companies, who often have trouble qualifying for conventional lines of finance. Consequently, selling your accounts receivable to a funding company can be an ideal source of financing if your company has solid growth prospects but is hampered by cash flow problems.
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.