Just about every business understands that when they sell to another business that business usually expects to receive 30 day payment terms. This 30 day period often becomes 40 to 45 days and this can put a serious cash flow strain on just about any business. When your business starts to slow down or turn away opportunities because your cash is not in house, then factoring invoices may be your solution.
Factoring receivables was created to eliminate the payment gap that your customers created by paying you 30 to 60 days after the sale was completed. It sounds silly that a financial tool was created simply to get a business paid when they did what they were suppose to do to be paid in full, but that is what traditional sales credit terms have done. We get calls every day from business owners who need funds for payroll or other reasons because they are waiting for payments from customers. We often mention invoice factoring as a solution and they are surprised to find out that indeed they can get paid in one day and normally for less than the price of accepting a credit card payment. The factoring company will advance around 80% to 90% of the invoice total to you the day you submit the invoice for funding and then when your customer pays you get the remaining amount back, less the factoring fee which ranges from 1% to 5% in most cases.
The other nice piece to the factoring solution is that getting approval is usually dependant on your customer’s credit and that allows companies with little established credit leverage customers good credit to obtain a financing solution. If your customers want to use your money for 30 to 60 days, then they should pay to use your money. Many businesses add the cost of factoring to the pricing model so the customer is paying for the credit terms. It makes sense if you’re acting as a bank for customers they should pay for the cost of money, just like a bank.
If your customers are paying in 30 to 60 days and you need cash back within your business sooner, then factoring invoices should provide a quick solution at very reasonable cost.