One of the side effects of the global recession and credit crunch is that clients are taking longer to pay invoices. Customers who paid in net 30 days are now paying in net 40 or net 60 days. Because of this trend, many commercial customers are now paying invoices in net 90 or more terms. This trend has put a substantial strain on small businesses who feel the effects on their cash flow.
Can factoring help?
In principle, factoring is an ideal solution for this type of problem. The factoring company advances funds to the client and holds the slow-paying invoice until maturity. The only problem is that most factors cannot finance an invoice that is payable in net 90 (or over net 90) terms. There are three reasons why these invoices cannot be factored.
Reason #1: Insurance and bank terms
Many factors get part of their financing from conventional banks and lending institutions. Furthermore, many use credit insurance to protect them from major invoice defaults. Most bank financing contracts and most credit insurance contracts exclude net 90 invoices specifically and prevent factors from financing them.
Reason #2: Increased risk
As a rule of thumb, the longer it takes a company to pay an invoice, the higher its risk of default. Why? Simply put, most companies delay paying invoices in order to conserve cash. By demanding net 30 terms, customers get the equivalent of a short-term, interest-free loan, which improves their cash flow. However, taking too long to pay an invoice is often considered a sign of financial distress and often precedes a default. As a result, factoring companies generally avoid these invoices.
Reason #3: Cost
Even if you could factor net 90 invoices, it would not be a good idea. In general, factoring is an expensive solution. And the cost of financing receivables increases as the invoices remain unpaid. Unless your profit margins are very high, financing these invoices may be counter-productive.
There are a few excellent, well-recognized companies that have recently moved their payment procedures to net 90 terms. In some instances, a factor can make an exception and finance invoices for these specific companies. However, these exceptions are rare.
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We can provide you with a competitively priced factoring quote. For information, Please call (877) 300 3258.