Although payments seem to take longer to come by, expenses seem to pile on very quickly. You have suppliers to pay. Payroll. Utilities. Office expenses. And the list goes on. This creates a serious gap in your company’s cash flow. And this gap can prevent your company from growing once the economy improves and sales start increasing.

One way to fix this problem is to ask clients to pay their invoices faster. However, this seldom works as most clients are paying slowly because they have problems of their own. The alternative solution is to get business financing. Few companies are able to obtain business loans in the current environment though. Institutions are only lending money to companies that have impeccable financial statements, substantial assets, years of experience and well seasoned management. And even if you meet this criteria, qualifying for a business loan is far from certain.

A third approach is to fix the cash flow problem using accounts receivable factoring. This solution reduces the cash flow gap by financing your invoices, and therefore reducing the amount of time it takes you to receive payments. The transaction uses a third party financing company referred to as a factoring company.

The transaction mechanics are fairly simple. Once you have an invoice from a credit qualified client, you sell it to the factoring company, which pays you for it in a few days. The factoring company will buy your accounts receivable in two payments. The first payment is usually for 80% of the invoice. You get the remaining 20%, less a factoring fee, once your client pays the invoice in full.

Qualifying for accounts receivable factoring is easier than qualifying for conventional business financing. The most important requirement is that your clients need to have solid commercial credit.

There are many things that can cause cash flow problems. The most common problem is a simple one: timing. The timing of the revenues does not match the timing of expenses. For many companies, expenses come before revenues. For example, a product supplier buys inventory (an expense), sells it on net 30 terms and then collects revenues 30 days later. Likewise, a staffing agency can place employees, who must be paid weekly but then bills the client on net 30 terms. Again, they wait 30 days before being able to collect the revenue. Unless the company has a capital reserve to operate the company and grow while waiting to be paid, it will run into problems.

The solution to this problem is fairly simple. The right business financing solution can fix it. The problem is that getting a business loan can be very difficult for small companies. They require substantial documentation and collateral. And many times, they can take a long time to close as the institutions credit committees review the cases. There is an alternative solution that can work better than a small business loan – especially if your challenge is that you cannot wait 30 to 60 days to get paid by clients. It’s called factoring financing.

Factoring is a very different than conventional business loans. With factoring, you get an advance for your outstanding invoices. This is the equivalent of a quick pay. This helps correct the timing problem between expenses and revenues and provides your business with the cash flow to support existing operations and new sales.

Most factoring companies don’t lend money, rather they buy the financial rights to your invoices. Their most important consideration is your clients’ ability to pay the invoice in a timely fashion. This makes invoice factoring accessible to companies who don’t have substantial assets but do have great clients. However, the credit quality of your invoices is not the only qualifying consideration of a factoring company. Your business must also be free of judgments, lawsuits and liens.

Factoring transactions tend to be structured as a sale with two installment payments. The first installment is usually 80% of the invoice value and is given to you as soon as the invoice is sold to the factoring company. The second installment, usually 20% less the financing fee, is given as soon as your client pays for the invoice.

Small business factoring integrates quickly into most organizations and it has a very specific scope: it is designed to solve the cash flow constrains generated the timing discrepancy between expenses and revenues.

Many companies that run into cash flow problems do so because there is a timing gap between expenses and revenues. Usually expenses are immediate, but revenues are delayed for 30 to 60 days. Revenues are usually delayed because of the common practice of offering net 30 payment terms to clients. This timing gap can affect the availability of funds for other projects or worse, may force the company to delay certain critical payments.

One possible solution is to use a business loan (or line of credit) and use it to cover expenses when available funds are low. However, business loans are usually hard to obtain and can have inflexible limits. Furthermore, the loan application process can require that you provide the institution with substantial documentation and can take a long time to close. Many times, a better solution is to use receivables factoring to accelerate your revenues.

Factoring accelerates your revenues by providing your company with an advance for your net 30/60 invoices. This provides the necessary funds to cover operating expenses. The accelerated cash flow strengthens your company’s financial position enabling you to capitalize on new opportunities.

Qualifying for accounts receivable factoring is relatively easy since the main collateral are your invoices, which are backed by the reputation of your clients. It’s also more flexible than other forms of financing since it’s dynamic and moves in parallel with your billings. This enables your financing to grow, as your company grows. Accounts receivable factoring is an ideal solution for companies in the staffing , services, manufacturing and transportation industries.

One specific challenge stems from selling products and services to other companies on net 30 terms. This can be a problem because most companies incur a number of expenses before delivering their product or services. Waiting an additional 30 to 60 days to get paid increases the gap between spending funds and receiving revenue. This forces the company to dip into reserves to pay for operations. There is no problem with this strategy as long as the company has sufficient reserves. However, the company can get into problems very quickly if the reserves are exhausted. Interestingly, this can happen from a seemingly positive event, such as winning a large sale or project.

There is a specific business financing solution for this type of problem. It’s called accounts receivable factoring and it works by providing your company with a quick payment on your net 30 to net 60 invoices. The quick payment reduces, or eliminates, the gap between expenses and revenues. This puts your company on a solid financial footing, providing a platform for sales growth.

Qualifying for receivables factoring is usually easier than qualifying for a small business loan. Most factoring companies are more interested in the quality of your receivables than anything else since that is the collateral that secures their transaction. Thanks to this approach, small and medium sized companies with few assets other than a strong list of clients can usually qualify.

Accounts receivable factoring integrates fairly easily into most companies and works as follows. Once your company completes the work, you send a copy of the invoice to the factoring company. The factoring company gives you the first advance on the invoice which is about 80% of the face value. Once your client actually pays the invoice, the factoring company remits the second advance, which is the remaining 20% less the financing fee.

This type of financing lends itself well to certain industries. For example, staffing, security and transportation companies commonly factor receivables as a way to ensure they have funds to meet operational expenses.

Invoice factoring has been gaining popularity as an alternative to conventional business loans, especially for startup, growing and distressed companies.

At a much simpler level, it means that you are not making as many sales as you could. Let’s say that you have $50,000 and have two sales opportunities. Each sale opportunity requires a $50,000 investment to buy supplies and deliver the service. Sale opportunity #1 has a return of 15%. Sale opportunity #2 has a return of 20%. Logically, you choose sale #2. But what if sale #1 is still profitable for you? Wouldn’t it be great if you could also pursue that project? Well, you can’t because you lack funds. You have to ration your capital and can only pursue one opportunity. This can be painful for business owners that are forced to turn sales away.

One obvious solution to the capital rationing problem is to get business financing. That is easier said than done, especially in the current economic environment. Both business loans and lines of credit can be used to deal with capital rationing but can be difficult to obtain, especially for small and midsized companies. Qualifying for a business loan usually complicated and requires that a company be profitable for a number of years. Usually, most banks and institutions will also require substantial collateral before providing a business loan.

One alternative is to use factoring financing. Most companies have to wait 30 to 60 days before their invoices are paid by commercial clients. This has a negative effect on cash flow and many times affects a company’s ability to take on new projects. Invoice factoring provides an advance on your slow paying invoices, eliminating the payment wait. This accelerated payment enhances cash flow, providing funds that can be deployed to start new projects.

Whether factoring can help with your capital rationing problem is a complex question that varies based on each opportunity. However for many companies, especially those that are payroll intensive (e.g. staffing companies), factoring financing can provide to be the right solution to finance growth.

One alternative is to go the conventional route and try to get a business loan (or a line of credit) from a bank or a lending institution. However, credit requirements have been tighten substantially and few businesses are able to qualify for any type of financing. And those that do must be ready to provide and substantiate a long standing track record of profitability. Additionally, both companies and business owners can expect to put more collateral than previously required to secure the loan. Although conventional business financing may be out of reach for some companies for the time being, there are other options that can be used to finance their growth.

One alternative is to use invoice factoring. This type of financing is ideal for companies that have clients that pay in 30 to 60 days, but needs the funds sooner. Factoring helps businesses that need to convert invoices into cash to meet payroll or start new projects. One advantage of factoring over other alternatives is that factoring companies are most interested in the strength of your invoices, as that represents a company’s best collateral. So a midsize company that has no other collateral than invoices from strong clients can usually qualify. Companies that usually benefit from this type of financing are labor intensive businesses, such as staffing agencies, and consulting companies among others.

But factoring can’t always help every company. Consider this example. Suppose a product reseller, gets a large order from a retailer. The reseller needs funds to buy the product from their supplier (or manufacturer), in order to fulfill the purchase order. One good alternative is to use purchase order financing. Purchase order funding can provide the funds to pay the supplier, enabling them to fulfill the order. The transaction is settled once the retailer pays for the goods. Qualifying for purchase order funding is harder than qualifying for invoice factoring. To qualify, the transaction must have a minimum of 20% gross margins and the client must buy the finished goods from their supplier.

Although not widely used yet, these business financing alternatives have been gaining traction in the current economy. They enable mid size businesses to grow by allowing them to leverage on their most important assets – the purchase orders and invoices from their customer base.

One solution to this problem has been gaining popularity recently. It’s called accounts receivable factoring and it allows you to turn your slow paying receivables into cash, almost immediately. It works by selling your receivables to a factoring company, who in turn, pays you on the spot. This provides you with the necessary cash flow to pay suppliers, rent and salaries.

Selling your receivables to a factoring company is relatively simple. It can be done with a 3-step process:

1. You deliver goods/services and issue an invoice
2. You sell the invoice to the factoring company who advances the first installment you up to 90% for them. The average advance is 80%.
3. Once your client pays the invoice, the factoring company rebates the remaining installment, less a small fee (installment #2)

As opposed to other financing products, accounts receivable factoring is easy to obtain and can be setup in a week or so. A critical benefit of a/r factoring is that the financing companies make their credit decision based on your clients. So, accounts receivable factoring is an ideal tool for small and medium sized businesses who cannot obtain bank financing but have a roster of solid customers.

But you have expenses that you have to pay now. Suppliers need to be paid. Payroll must be met. This creates a big challenge for small and medium sized businesses.

Is the solution a business loan? It seldom is. They are hard to get. And when you get them, your hands are tied until the loan is paid off. With business loans, you can only get one at a time. So if your business grows and you need more money, you are out of luck.

If your biggest headache is slow paying customers, a better solution is to factor your receivables. Receivable factoring provides you the necessary financing to pay employees, suppliers and taxes. Above all, it provides you with peace of mind by eliminating (or at least minimizing) your financial worries.

Receivables factoring works on a simple premise. Your invoices are valuable assets that can be financed. Basically, the factoring company advances you money for your slow paying invoices and waits until your customer pays. Of course, they charge a small fee for this service. This is how it works:

1. You do your work, as usual. You bill your customer but then submit a copy of the invoice to the factoring company for financing
2. The factoring company provides you an immediate advance on 70% to 90% of the invoice (there is a 10% to 30% reserve). You can use that money to meet payroll and pay expenses.
3. The factoring company waits to get paid by your customer
4. Once they are paid, the transaction is settled and the factoring company rebates any reserves.

As you can see, factoring gives you immediate money for your slow paying invoices, enabling you to run and grow your business. Qualifying for factoring is really easy. The biggest requirement is to do business with credit worthy customers. So, if your customers are good (but slow paying), you can finance them.

Receivables factoring is a great tool to finance your business and grow it to the next level.

Liquidity problems are very common for companies that sell to other businesses. In the business to business environment, it is common to offer 30 to 60 days to pay an invoice, especially if your client is a large company. This creates a substantial cash flow problem, since you need to spend money to service your client and then wait to be paid.

There is an alternative. Let’s suppose that you could get 80% of your payment immediately upon delivering your product/service, with the remainder after 30 to 60 days. Would that help your business? Would that provide the necessary cash flow to pay rent, employees and suppliers? A more important question is, would you feel comfortable taking new business if you knew you would get paid quickly?

Accounts receivable factoring can provide the solution. The proposition is simple. You get an 80% advance on your invoices as soon as the work is completed. You receive the remaining 20%, less a small fee, once the invoice is fully paid.

One big advantage of factoring receivables is that it’s easy to obtain. The biggest qualification requirement is that you do business reliable customers. Aside from that your company must be free of liens and judgments. Generally, the set up process takes about a week and after that you can get funding within a business day of submitting a request.

Factoring rates vary and will be based on the quality of your clients and the amount of financing you need. Generally the monthly costs will be between 1.5% and 3% depending on these variables. As rule of thumb, factoring can work well if profit margins are at least 15%.

Receivables factoring provides a great solution for a specific problem – the gap generated between invoicing for services and receiving payment. If you have clients that take up to 60 days to pay, and you need financing to cover business expenses, factoring is a good alternative to conventional business loans.

Slow cash flow is the biggest challenge to company growth. And business owners, like you, know that the biggest cash flow problem is having to wait up to 90 days to get paid by your commercial and government customers.

Going to the bank for a business loan won’t help much, unless your company has a great past history. This is because banks give business loans based on past performance. What you need is a financing product that can finance your company based on its future potential. And who better to evaluate your future potential than yourself? This is where receivables factoring can help you. This is because, receivables factoring is self-financing.

Receivables factoring, also known as invoice factoring, works by eliminating the 30 to 60 days it takes for commercial clients to pay you. It enables you to get a substantial portion of the money owed to you within a day or two of invoicing, providing you with funds to pay rent, meet payroll and more importantly – expand your business.

Imagine if you could get paid consistently, just two days after invoicing. How fast could your business grow? And without debt. This is how receivables factoring works:

1. You invoice your customers as you always do
2. You send a copy of your invoice to the receivables factoring company for financing
3. The factoring company advances you up to 80% of your invoice (20% is not advanced to cover potential disputes, etc.)
4. You get your money right away. The factoring company waits to get paid by your customer
5. Once your customer pays, the factoring company rebates you the 20% reserve, less a small fee

Factoring can be a very cost effective way of financing your business. The factoring fee is based on three factors:

1. The credit quality of your customer,
2. Your monthly volume and,
3. How long it takes customers to pay your invoices.

As a rule of thumb, monthly costs can go from 1.5% to 6% per month depending on these criteria.

If you own a company that has a lot of capital tied in slow paying receivables and if you need financing right away, you should consider factoring your invoices.