Factoring Financing Articles

Most companies experience a cash flow shortage at one time or another. Unfortunately, thanks to toughening economic conditions, cash flow shortages are becoming common place. As a general rule, experts recommend that companies keep a cash cushion that is equivalent to six months worth of operating expenses available as cash in a bank account. The cash cushion can cover any variations in your cash flow and enables the company to operate efficiently.

There is a problem with this strategy, though. Few small companies can afford to have that much money tied in a bank account. Especially in the current economic environment. But without it, the company is exposed to serious problems if customers start paying late or if they face an unexpected expense.

One way to bridge any gaps in cash flow is to get business financing. Getting a business loan can be difficult and time consuming. Lending institutions have tightened their due diligence requirements and will only provide business loans to companies that have solid balance sheets, seasoned management teams and well developed growth plans. The problem with this is that few small companies have solid balance sheets. In this case, an alternative source of funding called invoice financing may be the right solution.

Invoice financing can reduce/eliminate the 30 to 60 day wait to get paid for your accounts receivable. It provides an advance payment for your invoices, smoothing out your cash flow and ensuring you are better prepared to meet your expenses and address new opportunities.

Financing your invoices is fairly simple. You work with an invoice financing company, who evaluates the quality of your account receivable and provides an advance based on those results. One important advantage of invoice financing is that the financing company considers the invoices to be strong collateral. Because of this, small companies with a solid list of clients can usually benefit from financing their invoices.

Business owners are usually surprised that a business that has solid income can actually have serious cash flow problems. Sounds like a contradiction, but consider that income is usually booked when you invoice the client – not when they pay. And in the commercial world, clients pay on “terms” and can take 30 to 60 days to pay for their invoices. This cash flow gap can surprise many business owners and create serious problems to the company.

One way to handle the gap is to try to convince clients to pay their invoices sooner. Sometimes this works. Oftentimes, it doesn’t. Clients like to pay invoices in 30 to 60 days because it helps their own cash flow. You can be sure they will be reluctant to change their payment habits.

Another alternative is to apply for business financing. The current lending environment is difficult though, and getting a business loan will require substantial work and take time. Since most institutions are being very careful with their business loans, you can expect them to be very diligent and require a lot of documentation, such as financial and tax reports. And even if you have reasonable financial statements, there is a chance your request will be denied for other reasons.

There is a third alternative is to use a financial intermediary to get a quick payment on for your invoices. Invoice financing, as the process is called, is relatively straight forward. A financing company advances a payment against your net 30 to 60 invoices. They hold the invoice until it pays, while you get immediate use of the money. The company charges a fee, usually a percentage of the invoice, for this service.

One advantage of this form of financing is that the financing company provides you with financing based on the strength of your invoices. This enables small companies with a good list of clients to get this form of financing. Another advantage of invoice financing is that it’s easier and faster to qualify for than a small business loan.

Invoice financing can be a great solution for companies that have good clients but can’t wait 30 to 60 days to get paid for the products and services.

Let’s examine a situation that is all too common in business. A small business lands a contract to supply products or services to a large company. It’s a solid contract that calls for ongoing deliveries and will be very profitable for your company. However, there is a small problem. Your client has asked that you give them 60 days to pay the invoices.

This puts you in a complicated situation. If you try to negotiate for a quicker payment, your client may think that your firm does not have the financial wherewithal to provide the product or service. If you agree to those terms, you have to be prepared to cover all expenses for two months. It’s a difficult choice. What’s worse, if you can’t afford to wait 60 days to get paid, your only alternative is to turn the opportunity away.

The common solution is to get business financing and use that to cover the 60 day gap. However, few conventional financing products are designed to solve this problem. A line of credit is probably a good solution. A business loan, on the other hand, may not be the best solution. Although business loans can help address this problem, they tend to be better suited to buy capital goods and equipment.

There is one solution that is specifically designed to solve this problem. It’s called invoice financing. As its name implies, invoice financing provides funding for your net 30 to net 60 invoices. This is equivalent to getting a quick payment on the invoice and enables business owners to cover business expenses without having to wait up to 60 days to get paid by clients. It provides stability to company’s cash flow, enabling the owner to better manage expenses and to better determine which opportunities to pursue.

Most invoice financing transactions are structured as a purchase, where the factoring company finances the invoice in two installments. The first installment, usually 80% of the invoice, is made as soon as you invoice your client. The finance company withholds 20% to cover any invoice discrepancies or underpayments. However, the remaining 20% less the discount, is advanced as soon as your client actually pays for the invoice.

Offering 30 day payment terms, or net 30 as it’s called, is a requirement for companies that sell goods and services to larger companies or the government. As a matter of fact, thanks to the recession, most companies are paying their invoices in 45 or as many as 60 days. Larger companies do this because it’s a source of cheap financing for them. They get use of your services and products for up to 60 days before having to pay for them.

While this arrangement is good for the larger businesses making a purchase , many small and medium sized vendors can’t afford to wait 60 days to get paid. They have their own expenses to deal with – salaries, rent and vendors. Due to this, growth will be limited to the amount of available capital. Vendors will sign on new clients until they reach the point where they can no longer afford to offer terms – and then stop growing.

One way to extend your capabilities and support growth is to get business financing. Some financial products address this problem better than others. Small business loans, for example, can be used to cover operating expenses but are not ideal as they are usually better suited for buying assets or making certain types of investments. Lines of credit offer more flexibility than a business loan in this case, but like most business loans have bank imposed maximums or limits.
Usually, a better solution is to use invoice financing. As its name implies, this solution provides you with financing based on your invoices. The financing company advances you funds against your invoices, enabling you to cover operating expenses.

By financing your invoices you can offer net 30 to net 60 terms without having to worry about waiting for payment. This provides you an important competitive benefit while improving the financial stability of your business. Invoice financing is a flexible solution as it dynamically adapts to the changes in your accounts receivable. This enables you to focus on the most important task of all – growing your company.

One of the most important features of invoice financing is that it’s easier to obtain than other forms of financing. All you need is a business that is free of liens/judgments and has a solid roster of clients who pay their invoices in 30 to 60 days.

Managing the cash flow of a growing business is a constant juggle for company managers. On the revenue side, most of your clients want to pay their invoices on 30 to 60 days. On the expense side, you have to deal with many immediate expenses that have different payment timeframes. Most pressingly, payroll, which tends to be either monthly, biweekly or weekly.

One way to improve your cash flow is to demand that your suppliers give you the same terms you offer your clients. In other words, if you give 45 days of payment terms to your clients, you want your suppliers to give you 45 or more days. This is easier said than done. Unless you own a large company or have impeccable business credit, most of your suppliers will demand quick payment.

One of the easiest ways to get into a cash flow squeeze is to have clients that pay in 60 days but have expenses that are immediate. Your only solution is to cover the gap with your company’s resources until invoices get paid. Unless you are careful managing your sales, revenues and expenditures you are bound to get into trouble and run out of resources.

One way to solve this problem is to use business financing. Although a small business loan is seen as a solution by many, they have their own challenges. They are hard to get, require extensive application processes and more importantly, require that the company and its owners have impeccable credit. An alternative to a conventional business loan is to use invoice financing.

Invoice financing eliminates the 30 to 60 days invoice payment wait, helping companies gain a more stable financial footing. It’s provides the funds you need to meet you immediate expenses, enabling you to tackle new opportunities.

One critical difference between invoice financing and other products is that invoice financing companies look at the credit worthiness of the company paying the invoice as their most important source of collateral. This feature makes invoice financing a viable alternative to small companies with thin or no credit, but a strong list of clients.

Most invoice financing transactions are arranges as an invoice purchases, where the factoring company finances/purchases the invoice in two installments. The first payment, usually 80% of the invoice, is made as soon as you submit the invoice to your customer. The remaining 20% ,less the discount, is advanced as soon as your client actually pays for the invoice.

Having a business loan application rejected can be a very heavy blow for a business. Ultimately, this may mean that the business will not be to invest for growth – or not be able to cover certain expenses. For many companies, having business financing is a requirement for growth as they need funds to be able to expand the company into new opportunities.

The two most commonly known financial products that are used to improve a company’s cash flow are conventional small business loans and lines of credit. Although these two products are the best know, they don’t always provide the best solution. If the biggest challenge your company has is that you can’t afford to wait 45 days to get paid by your commercial clients, you should look into invoice financing.

Most commercial transactions follow the same format. The product or service is delivered, along with an invoice. The client then has between 30 to 60 days to pay your invoice, depending on the terms you offer. Many companies have no alternative other than to offer payment terms simply because large companies demand it. It is a cost of doing business, though it could cost you your business if you can’t manage your cash flow properly.

One way to solve this problem is to use invoice financing. Invoice financing is a fairly straight forward product that has been gaining market traction in the past years. It eliminates the 30 to 60 days invoice payment wait, helping companies gain a more stable financial footing. One critical difference between invoice financing and other products is that invoice financing companies look at the credit worthiness of the company paying the invoice as their most important source of collateral. This feature makes invoice financing a viable alternative to small companies with thin or no credit, but a strong list of clients.

The majority of invoice financing transactions are structured as an invoice purchase, where the factoring company finances the invoice in two installments. The first payment, usually 80% of the invoice, is made as soon as you submit the invoice to your customer. The remaining 20% ,less the discount, is advanced as soon as your client actually pays for the invoice.