Although larger companies have sufficient reserves to wait for payments, few small companies do. And, due to the lack of credit, small companies usually need to pay their own bills sooner. This creates an unsustainable situation, where the end result is downsizing the company, if not closing it.

The most obvious way to solve this problem is to get a business loan. The problem, especially in today’s market, is that qualifying for business loans is very hard. Most institutions are being cautious, in part due to their own capital problems, and are only providing business financing to their prime customers. These are customers that have solid income statements, strong balance sheets and seasoned management teams. This also rules out a number of small and midsized business owners who also need the funding.

One alternative that is often overlooked is invoice factoring, a solution that is specifically designed to address slow payments from commercial clients. It helps by providing an advances for your slow paying invoices – this accelerates your cash flow enabling you to meet your obligations. You get immediate funds, while the factoring company who bought the invoice from you, waits to get paid. The transaction settles once your client actually pays the invoice. The factoring company charges you a small fee for the service.

The transaction is usually structured as a sale – where you sell your invoice to the factoring company. Because of this structure, factoring companies are more interested in the commercial credit of your clients than yours. This means that small to medium sized companies whose biggest asset is a list of solid customers can usually obtain factoring financing.

A business loan is not always the best solution to cash flow problems, especially if these are caused by slow paying clients. In most commercial transactions, clients have to pay their invoices in 15 to 30 days. However, most companies have been extending their payment terms to 45 or 60 days as a way to cope with the current credit crisis. Small businesses have been affected the most, because they can’t afford to wait 45 to 60 days to get paid. The need the funds immediately to fulfill their own obligations.

Factoring financing could be a good solution If the company’s biggest problem stems from cash flow and clients that take too long to pay. It is very different than a business loan. With factoring, a financial intermediary called a factoring company buys your invoices for an immediate payment. They wait for your client to pay the invoice and settle the transaction, while you get the benefits of the immediate funding. Most factoring companies will charge a fee for their services – usually a percentage based on the invoice.

One of the biggest advantages of working with a factoring company is the way the structure their transactions. Since they buy your invoices, their biggest concern is the credit quality of the company paying for the invoices. This allows you to leverage your client’s commercial credit and make it work to your advantage. Thanks to this structure, small companies that have a solid list of clients can usually qualify for this type of financing.

Factoring can be an ideal solution for companies that can’t afford to wait 60 days to get paid and that sell to solid commercial clients.

Unless a company has a substantial capital reserve, waiting for payments can be very difficult. There are businesses expenses that must be met – rent, telephone and supplies. There is also payroll, one of the most important businesses expenses that must be met – on time – every time.

If you lack the funds to wait, the obvious solution is to get business financing. This is easier said than done, especially in the current market. Qualifying for a business loan can be a long tedious and uncertain process. One alternative to business loans – at least in some instances – is to get and advance on your invoices using invoice factoring.

Invoice factoring is a simple financing process that provides you with an immediate advance on your invoices. Instead of waiting for your clients to pay, a factoring company advances you funds on each qualifying invoices. The transaction is completed once your client pays the invoice in full. The factoring company charges a fee for this service, which is usually based on a percentage of the invoice gross value.

Factoring has a couple of advantages over conventional business financing. A factoring company is in effect, buying your invoice for a discount (their fee). Because of this structure, they are more interested in the credit quality of your clients than in the financial strength of your company. This makes it easier to qualify for. However, your company must be reasonably well managed and free of any liens or encumbrances. The other advantage is that qualifying for factoring is a quick process – and can usually be completed in a couple of weeks.

Although factoring is not a cure-all, it’s an innovative solution that should be considered if your company cannot afford to wait to get paid on its invoices.

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Invoice factoring is a form of financing that is often offered by factoring companies. It’s ideally suited for companies that are selling goods/services on net 30 to net 60 days, but can’t afford to wait for payment. This is a common problem since most medium sized companies have immediate expenses and don’t have the necessary capital to wait for payment.

Factoring companies solve this problem by accelerating payment of your invoices. They act as an intermediary who buys your invoices and pays you for them immediately. This provides your company with the necessary cash flow to pay operating expenses and handle new orders. The factoring company, which now holds the invoice, waits for your client to pay for the invoice and settle the transaction.

A factoring company usually buys your invoice in two payments. The first payment, called the advance, is usually 80% of the invoice. The remaining 20% is called the reserve and is held to cover any invoice discrepancies and potential underpayments. Once your client pays the invoice in full, the factoring company sends the second payment, which is the 20% reserve less the factoring fee.

Factoring fees are determined by the credit quality of your clients, the volume of financing that you need, your industry and invoice diversification. They vary in range but they are usually a specific percentage of the purchased invoices.

One of the big advantages of invoice factoring is that factoring companies consider the credit quality of your invoices to be your biggest asset. This means that medium sized companies that have a solid roster of clients can usually qualify. However, to qualify for factoring your invoices need to be free of any potential encumbrances or liens.

Manufacturing companies tend to be cash flow intensive businesses. They are constantly paying suppliers and employees. There are equipment, payroll, supplier and rental expenses to handle. Most managers (or owners) will do their best to keep up to date with these payments, or they risk getting their company into trouble. What usually gets cash flow into trouble is that most clients pay their invoices in 30 to 60 days. Basically, most owners need to pay suppliers before they get paid by clients. Therefore, unless the company has a cash reserve, it will run into problems.

This situation can be fixed with business financing. Unfortunately, getting a business loan is the current environment is very challenging. Business loans are simply not available to companies unless they have stellar credit and impeccable financials.

But let’s review the problem though. The issue is the timing difference between when expenses are made and when payment is received. If you accelerate the payment, the problem is solved.
How do you accelerate a payment? One way to accelerate a payment is to finance it through a factoring company. When you factor an invoice, you assign it to a factoring company who gives you an advance payment for it. This accelerated payment can be used to pay corporate expenses therefore alleviating the pressure on your cash flow. The transaction is settled once your client pays the invoice in full. Factors will charge a fee for their services, usually a percentage of the invoice.

In an invoice factoring transaction, the factoring company is buying your invoice, rather than lending your company money. Since the factoring company is buying your invoice, the commercial credit of your customer (who actually pays the invoice) is very important. Because of this, many companies with good customers can qualify for factoring financing, even if they are startups or have some financial difficulties.

From a cash flow perspective, cash moves in only two directions. It moves in, when you make money. It moves out, when you pay expenses. Keeping this flow in balance is one of the toughest jobs in any business.

This problem is even more complex for companies that sell to other businesses or to the federal government. Large business clients usually expect to be given terms – which means that they will pay their invoices in 30 to 60 days. But as a business owner, you are usually presented with expenses that must be paid regularly. There is rent. There is payroll. And then, there are suppliers. All of which demand payment now. This difference in the timing of the flow of “cash in” and “cash out” usually creates a problem for business owners. If the business has ample cash reserves, the solution is simple. Pay the expenses now and replenish the reserves once a client pays. But what if you own a small business – or a growing business – and have no reserve? Then you must get business financing to cover the gap.

Most people think that obtaining business financing is difficult and requires a complex application process. While this is true for certain business loans, it is not true for all financial products. As a matter of fact, factoring, a product that is designed to deal specifically with cash flow problems, is fairly easy to get.

Factoring provides a simple solution. You sell your invoice to a factoring company, who advances you money for it. This reduces the time you take to get paid. The transaction is settled once your client pays the invoice in full. It’s a fairly simple concept.

As a matter of fact, you are selling the invoice to the factoring company, so usually factoring is not considered a business loan. Because of this, factoring is relatively easy to get, provided your company does not have any liens or judgments and provided your clients have good commercial credit.
Factoring financing is a little know solution that can help a company improve its cash flow and when used correctly, it can position the company for growth.

Although most business owners are familiar with how business loans work , few are familiar with factoring. The most important thing to know about factoring is that it is designed to help companies that cannot afford to wait 30 to 60 days to get paid for their invoices. Companies that sell products to other companies or the government usually need to wait 30 to 60 days to get their invoices paid. While some companies have no problem extending 30 days terms, many do and can’t wait. Invoice factoring solves this problem by giving your company an advance for the invoice. This minimizes the amount of time you wait to get paid and provides funds to cover business expenses.

When you factor an invoice, your company actually sells the financial rights to the invoice to the factoring company. Because of this, the transaction is structured as a sale, with two payments from the factoring company. The first payment, usually referred to as the advance, is given to your company as soon as you sell the invoice. The advance is about 80 to 90% of the invoice. You get the remaining payment of 10% to 20% (less factoring fees) once your client actually pays the invoice. This second payment is usually referred to as the rebate.

One major difference between a business loan and a factoring line is that qualifying for factoring is a lot easier and quicker. Since factoring companies are usually buying the invoices they factor, their biggest concern is the credit worthiness of the company paying the invoices. Because of this, small businesses and distressed companies can usually have a good chance of getting a factoring line, provided they work with a strong roster of customers.

Costs for factoring will vary but are usually higher than the cost of a business loan. Costs are determined by the size of the line, the credit quality of the invoices, the industry and the stability of the client’s business.

So, what happens if you bid for a government contract, win it, and realize that you don’t have the capital to deliver? One alternative is to try and go to an institution to get business financing. Many institutions will provide a business loan (or similar financing) to government contractors. But as you know, qualifying for business loans can be very difficult, especially for startups. Institutions will review your business plan, along with your company’s financial statements, management team and track record. Because of this, many startup companies find that obtaining financing can be very challenging.

This problem is particularly challenging for product re-sellers. Most product re-sellers that work with the government need to pay their suppliers before they get paid by the government. Because of this, they can only compete for certain bids since their capital limits the size of the projects that they can pursue. Some resellers are able to negotiate better terms with their suppliers, basically enabling them to wait until the government pays them first.

There are two other alternatives that can help you grow. They are invoice factoring and purchase order financing. Both are alternative sources of financing and can be ideal for government suppliers.

Let’s looks at two examples to see how invoice factoring and purchase order financing can help your company grow. Let’s say that you have a government purchase order that you have completed and will get paid in 30 days. Let’s also say that your supplier needs to be paid in 10 days. The problem could easily be fixed if you could get an advance payment on your government invoice. That is exactly what accounts receivable factoring can do for you. It provides you with an advance on your invoice that enables you to pay your supplier on time. This enables you to maximize the use of your supplier’s payment terms to your advantage, helping you grow your company.

Now let’s look at a more complex problem. Let’s assume that you won a government contract that is substantial and you have a supplier that is demanding an advance payment before shipping the goods. This situation is very common for startups because few of them have any type of supplier credit. In this case, the solution is to use po financing. PO funding helps you pay your supplier so that the government order can be fulfilled. The transaction is then settled once the government receives the goods and pays for them.

Both receivables factoring and po funding are available to both new companies and established companies. Both are relatively easy to obtain and can be set up relatively quickly. This makes it an ideal solution for growing companies.

Without venture capital, many business owners try to finance their companies by looking for a business loan from a lending institution. However, business loans are only given to companies that have strong collateral and can show profitable operations. Companies will also need to provide financial statements that will be rigorously reviewed to ensure that they meet institutional criteria. Because of this, this type of business financing is out of the reach of many business owners, especially at this time.

There is are alternative ways to finance your company. They can help you expand your company organically without generating any new debt. And more importantly, without having to give any equity in the business to someone else. Remember that when you use venture funding, you are selling a piece of your company to someone else. They will want a say on how things are done. Many times this is good, since venture capitalists usually have seasoned executives that can help you. However, it will take some of your independence away.

There are two alternatives that can help you, depending on your situation and line of business. One if factoring financing. Factoring bridges the 30 to 60 day gap between invoicing a commercial customer and actually receiving a payment. This advance payment enhances your cash flow, providing you with funds to pay current expenses and grow the business. The other alternative is to use purchase order financing. PO Financing only helps product resellers who have a large order and don’t have the funds to buy the product from their supplier. In both factoring and purchase order financing, the transaction is settled once the customer pays the invoice. And as opposed to other types of financing, the most important collateral if your customers credit rating. Thus, you can leverage your clients credit rating to fund operation expenses and growth. This makes factoring and purchase order financing an ideal solution for many businesses.

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.