Not too long ago, getting a business loan was relatively easy, especially if the business owner had a home that could be used as collateral. Nowadays, business loans are much harder to get. Financial institutions will ask for two to three years worth of financial statements and review them very carefully. Likewise, they will only get involved in lending transactions if the business has substantial collateral and if the owner has a significant net worth.  These criteria all but rule out small business. Because of this, alternative business financing solutions have been on the rise.

Most small companies that look for business financing do so because they have cash flow problems. Usually these happen because the company has to give 30 to 60 day payment terms to their customers but has expenses that need to be paid quickly. In effect, they can’t afford to wait up to 60 days to get paid. One obvious way to fix this problem is to use a line of credit to cover expenses while waiting to get paid. But if a line of credit is not an option, invoice factoring may be the right alternative solution.

Factoring is an form of business financing that accelerates your cash flow due from slow paying customers. It works by using a financial intermediary, called a factoring company, that advances funds  against your slow paying invoices. The factoring company holds the invoices as collateral, while your company gets a cash infusion that can be used to meet your current business expenses. The transaction is settled once your customers pay the invoices , though many companies establish revolving factoring lines that can be used on a regular basis.

Most factoring transactions are structured so that invoices are funded in two stages. The initial advance is provided  as soon as the work is completed and your customer is invoiced. Most initial advances are for 80% of the invoice, but this can vary based on certain conditions. The second advance is provided once the invoice is paid in full and covers the remaining 20%, less the factoring fee.

Factoring fees usually vary based on a few parameters such as the creditworthiness of your customers, the quality of your invoices, how long it takes for your customers to pay and the size of the factoring line.   Generally the factoring fee will be based on a percentage of the invoice.

One of the main advantages of invoice factoring is that it’s easier to obtain than most conventional financing. The most important criteria to qualify is the credit strength of the companies that will pay your invoices – this represents the collateral for the factoring company. Aside from that, your invoices need to be free and clear of any legal or tax encumbrances.  Lawsuits, judgments and tax problems may hinder your company’s ability to  get factoring financing. Most factoring companies will check this information during their due diligence process.

The biggest benefit from factoring is its flexibility. Most factoring lines are not based on fixed amount, but rather are tied to your sales. This means that the invoice factoring line can grow with your business, provided that your sales to are to credit worthy companies. This makes factoring an ideal solution for small and medium sized companies that have good potential that is being hindered by cash flow problems.

Many small companies that have run into financial problems could be helped with the right type of business financing. The problem is that companies that have financial problems usually don’t have access to business financing. Financial institutions are very conservative and will only lend money to companies that have solid collateral, impeccable financial statements and a solid track record of profitability. This will rule out most small businesses and almost any company that is in financial trouble. It’s the common catch 22 – where businesses that could benefit from funding don’t have a way to access it.

However, there is a business financing solution that has been gaining popularity with troubled companies – it’s called invoice factoring. Invoice factoring solves one common issue for small companies – cash flow problems created by slow paying customers. It solves this problem by working with a financial intermediary – called a factoring company – that advances you a payment for your invoices and then waits to get paid by your customer. This provides your company with the liquidity it needs to be able to meet its obligations on time without worrying about slow payments.

Factoring financing does have one important limitation though – it can only help companies that have cash flow problems that are created by slow paying customers. It cannot be of much help to companies that have other financial problems – such as low sales.

One of the advantages of factoring financing is that it is easier to qualify for than most conventional financing solutions. Generally, the most important requirement is that your customers need to have good commercial credit. This is important because your invoices are the collateral for the transaciton. Additionally, your company will need to be free of legal and tax problems.

Another important advantage of invoice factoring is that it usually does not have a fixed limit – like a loan or credit line. The factoring line is usually dynamically tied to your revenues, and grows as your business grows – provided you are working with solid customers.

The problem with this is that many small companies live invoice-to-invoice (not unlike paycheck-to-paycheck) and a delay in invoice payments can easily send their finances into a tail spin. And since few small companies have any meaningful cash reserves, a delay may impact their ability to pay suppliers – and more importantly – their ability to meet payroll. Missing payroll can have substantial negative consequences that could ultimately lead to the closure of the business.

Your first line of defense to prevent a cash flow shortage is to build a cash reserve. This is easier said than done since most small businesses don’t have the wherewithal to build a cash reserves. But if you can build a cash reserve, your company will be in a better position to weather the inevitable storms that will hit your cash flow. If building a cash reserve is not an option, then you should consider using a business financing solution that can allow you to cover payroll and other expenses if things get tight.

Invoice factoring is a business financing solution that can be used to correct cash flow issues relatively quickly and without the hassles associated with conventional financing. It works by correcting the problem at the source. It provides you a cash advance for your slow paying invoices, providing the liquidity you need to meet payroll and other important expenses. With an invoice factoring solution you can eliminate the uncertainty of client payments, enabling you to obtain a more predictable cash flow.

One of the advantages of factoring is that the most important thing you need to qualify for this type of financing is solid commercial customers. It’s ok if your customers pay slowly – provided that they pay reliably. Aside from this, your company needs to be free of legal and tax issues. And factoring can be deployed fairly quickly – usually in a week or two.

Another advantage of factoring is that it’s dynamically tied into your sales. This means that it can be increased easily as your sales increase, provided that you are invoicing credit worthy customers. This makes invoice factoring the perfect solution for small companies with good prospects that are hindered by cash flow problems.

With this in mind – what is the best way to deal with slow paying customers? In reality, there is no best way. Rather, there are a number of steps you can take to make sure you get good customers with solid payment records. If you follow these steps diligently you will minimize the chances that you will have problems from slow paying customers.

There are two things that you can before singing on a customer that will reduce the likelihood of having payment problems. First, when you work with clients you should always have an attorney written contract that outlines all the critical points of the sale, including the payment terms and the product/service acceptance criteria. This is critical because it puts all expectations in writing and gives both parties an opportunity to measure performance. Second, you should only extend payment terms to commercial customers that have a solid payment track record. To do this you will need to check your client’s commercial credit or references. Dun & Bradstreet and Experian both produce well respected business credit reports that are available online.

The next step is to manage your receivables properly. There should be a dedicated person that calls the customer shortly after the sale to make sure that they are happy with the product or service. This will help you identify potential disputes so you can resolve them quickly. And If the invoice remains unpaid after the due date, be sure to call the customer promptly to check on the status. However, be mindful of how often you call the customer since calling too often can cause problems. Lastly, you should always be respectful, polite and professional with all customer interactions.

However, there are times when you follow all the right steps and customers still pay slowly. This can create a cash flow problem for your company. In that case, you should consider using invoice factoring to accelerate the payment of your invoices. Factoring is a form of business financing in which a funding company, called a factoring company, advances funds against your slow paying invoices from credit worthy commercial customers. This provides you the needed funds to operate your business and relieves the pressures created by slow paying customers.

One of the advantages of factoring is that it’s much easier – and faster – to obtain than conventional business financing. Since factoring companies use your invoices as collateral – it’s critical that you work with credit worthy customers. Aside from this, your company should be free of legal and tax problems. Most factoring lines can be implemented in a couple weeks – which is comparatively fast. these Teatures make invoice factoring an ideal solution for growing firms the have good, but slow paying, customers.

Most financial institutions provide financing based on your company’s collateral, your assets, the strength of your financial statements and your track record. Few companies with cash flow problems can show solid financial statements. Furthermore, most institutions can’t provide business financing quickly. Most require a month or two to complete the process. If your company needs emergency financing, waiting a month can spell disaster. However, ff you have a specific type of cash flow problem, there is an alternative that is usually easier (and quicker) to obtain than a business loan – it’s called invoice factoring.

Most companies that that sell commercial goods or services have to give payment terms to their clients. This means that they have to wait up to 60 days to get paid for their services. On the other hand, they also have to cover their current business expenses regularly. This creates a timing gap between income and expenses. Companies manage this timing gap by paying for expenses out of their reserves, while waiting for customers to pay. Sometimes due to circumstances, the gap becomes unmanageable. And that is where companies run into problems.

The simplest solution is to close the timing gap by asking customers to pay quickly . This can work if you offer them an incentive, such as a 2% discount for quick payments. But ultimately, you will end up at the mercy of your customers payment habits. A better solution may be to factor your invoices.

Factoring provides your company with a quick payment for its invoices by using a financial intermediary. The financial intermediary buys your invoices for an upfront payment and then waits until your customer pays. This provides your company with the needed liquidity to operate and expand. The factoring company charges a small fee for this service.

Invoice factoring is relatively easy to obtain and can be setup fairly quickly – usually in a week or two. The most important qualification requirement is the credit quality of your customers – factoring companies can only finance your invoices to credit worthy customers. Aside from that, your company need to be free of liens and legal encumbrances. Invoice factoring an ideal solution for companies that need emergency financing due to cash flow problems.

Having cash flow problems is one of the biggest reasons why many growing companies run into problems. For many, these problems start because they give their customer up to 60 days to pay their invoices. This common practice forces companies to use their own resources to cover expenses while waiting for customers to pay. This can lead to problems when the company runs low on cash or when customers start taking longer to pay. At the very least, it will prevent growth. At its worst and if not managed properly, it can put your company out of business. There are two ways to solve this problem without using a business loan. One way is to give your customers an incentive to pay quickly. A common practice is to offer then a 2% discount if they pay in 10 days. The problem with this strategy is that you are still ultimately at the mercy of your customers. The second alternative is to use an invoice factoring facility, a tool that allows you to obtain quick payments from your creditworthy customers.

Factoring accelerates your customer payments by using a financial intermediary, called a factoring company, that buys your invoices at a small discount and pays you upfront for them. This eliminates the problem of having to wait for customer payments and strengthens your cash flow. When managed properly, you can use factoring as a platform to grow your company without incurring in conventional debt. An important feature of factoring is that most transactions are structured as invoice purchases rather than as business loans.

The factoring company’s fee, commonly referred to as a discount, varies and it’s based on the size of your invoices, your sales volume and the credit quality of your invoices. As a matter of fact, the credit quality of your invoices is the most important criteria for qualification. This enables small companies, whose biggest asset is a list of strong clients, to use factoring to their advantage.

There are three ways to reduce the timing gap and improve the cash flow of your business. One alternative is to accelerate your revenue by asking customers to pay sooner. Many companies are willing to offer a 2% discount on their invoices to customers that pay in 10 days or less. Another strategy is to delay your expenses. For example, ask your suppliers to give you 30 to 60 day payment terms. However, to get 30 to 60 days payment terms, your company needs to have a good commercial credit. Using these two strategies will allow you to better match your revenues and expenses. The problem is that ultimately, you are leaving the fate of your company at the mercy of its clients and vendors.

There is a third alternative to solve this problem. You can accelerate your revenues using an invoice factoring facility. Factoring allows you to finance your invoices from large credit worthy customers – basically leveraging their credit strength to get financing for your own company.

Factoring works by using a financial intermediary, called a factoring company, that buys your invoices and provides an upfront payment. Your company gets immediate funding that can be used to cover current expenses or invest in growth opportunities . Once the factoring company buys the invoice from your company, they hold it until your customer pays. Once your customer pays the invoice, the transaction is settled. The factoring company charges a small fee for this service.

Obtaining factoring financing is relatively easy – your company needs to be free of problems and it needs to work with credit worthy customers. And, the financing line is directly tied to your sales, enabling it to grow dynamically as your sales grow.

Factoring is an ideal business financing solution for companies whose biggest challenge is that they can’t afford to wait 60 days to get paid by customers.

Businesses owners, on the other hand, have their own problems because cash flow is tight. Customers that used to pay in 15 or 30 days are now taking up to 60 days to pays their invoices. However, small businesses still have to pay employees and vendors on a timely basis. This creates problems, forcing managers to juggle payments between vendors. To complicate matters, many small businesses are turning away new orders simply because they are unsure if their cash flow will allow them to service the client properly. This create a vicious cycle that puts business owners in a catch 22.

There is one way to break this vicious cycle, and that is to use business financing to strengthen the company’s cash flow, enabling the business to take on new orders and grow. And since few institutions are offering financing, the only option is to use alternative financing. One product that has been gaining traction in the past few years is invoice factoring.

Invoice factoring is designed to solve cash flow problems that are created by slow paying customers. It accelerates the receipt of cash, providing the liquidity you need to cover current business expenses and grow the business. By eliminating the conventional net 60 day wait for payment, your company is able to make business decisions based on the potential of a customer, rather than their payment habits.

Factoring works by using a financial intermediary between your company and your customer. The intermediary, called a factoring company, buys your invoices and pays for them by advancing funds to your company. This provides your company with the needed liquidity to operate and grow. The transaction is then settled once your customer pays the invoice in full, usually 30 to 60 days later.

As opposed to other forms of financing, accounts receivable factoring is widely available and relatively easy to obtain. This two biggest requirements are to work with credit worthy customers and to be free of major problems, like liens and judgments. Customer credit worthiness is particularly important because the whole premise of factoring involves leveraging your customers commercial credit to your own advantage. This makes invoice factoring an ideal solution for small and midsized companies whose biggest challenge is that they can’t afford to wait 60 days for their customers to pay.

Most companies with negative equity also have cash flow problems. Most commonly, these appear when the customers start demanding longer payment terms. Instead of paying invoices in net 30 days, they start paying them in net 60 days. This creates a liquidity problem that forces the company to start juggling vendor payments and other expenses while waiting to be paid. It also limits the ability of the company to take new orders. Before long, the company goes into a tail spin.

Many times, this cash flow problem can be corrected with business financing, enabling management to turn the company around. And here lies the problem. Getting business funding while having negative equity is nearly impossible. You won’t be able to find a line of credit or business loan. And if you already have financing, it’s unlikely that your institution will increase the line. After all, if you have negative equity, your company has no collateral. And institutions don’t lend without collateral.

There is an alternative however. If you biggest problem is that you have cash flow problems due to slow paying clients, factoring financing may be the right solution to help you turn your company around. Invoice factoring accelerates your client payments by using a financial intermediary between your company and your customer. The factoring company, as the intermediary is called, advances you funds for your invoices as hold them until your customer pays. This increases your liquidity, improving your ability to pay vendors and take new orders.

One of the advantages of invoice factoring is that it’s easier to obtain than conventional financing. The collateral that factoring companies are most interested on are your invoices from credit worthy customers. Most factoring companies are comfortable holding only that as collateral. Aside from that, your company will need to show how it plans to turn around its current situation.

If you currently have another business financing solution in place (e.g a business loan), you will probably need your lenders cooperation to add and integrate factoring into your company. Turning around a company that has negative equity is very challenging. You should consider hiring a qualified financial professional to help you with this situation.

Most factoring transactions are structured as the purchase of an invoice by a factoring company. The purchase is done in two installments. The first installment is called the advance, and is provided as soon as you sell the invoice to the factoring company. The percentage that is advanced is based on your industry, your track record, the payment record of your customer and market risk conditions. Most advances average 80% of the invoice. However, transportation companies using freight factoring can get advances as high as 90%. Likewise, staffing companies can get factoring advances that go as high as 90%.

The second installment, called the factoring rebate, is paid to you once the customer pays the invoice in full. The rebate will include the remaining amount that was not advanced, less any fees. For example, if the advance was 80%, the rebate will be 20%, less any factoring fees.

When a factoring company purchases an invoice from your company, it can do so with recourse or without recourse. In a recourse factoring transaction , the factoring company has the right to sell back to you any invoices that have not been paid within 90 days, regardless of the reason for nonpayment. A non recourse transaction is a little bit different. The factoring company will absorb the loss of a non paid invoice if (and only if) your customer does not pay the invoice due to a declared insolvency (such as a bankruptcy) during the purchase period. Each factoring company engineers transactions in their own way, so you should familiarize yourself with the terms of your contract.

One very important aspect of a factoring transaction is the notice of assignment. Before you start factoring invoices for a particular customer, the factoring company will need to setup the customer. This is usually a fairly quick process where the factoring company checks your customers commercial credit, and then notifies them that their invoices will be factored. The notification letter, commonly referred to as a notice of assignment, informs your customer that you are working with a factoring company, who is helping you with your receivables. It also contains a new payment address. Many times the payment can continue to be made in your company’s name, provided it goes to the new address. The notice of assignment is fairly standard in the factoring industry but each factoring company has its own version of it.

Although factoring transactions appear to have many moving parts, they are fairly simple to implement and can be easily integrated into most companies. One of its most important benefits is that factoring is flexible. The line is dynamic and tied directly to your sales. You can easily grow your financing – as necessary – provided you sell good products or services to a diverse number of credit worthy customers.