This can drain the life from a small business and most managers have no clue how to fix it. All that demanding work or product, but you only collect an average of 65-75%, spread out over four months? If the bulk of your collections are 90-120 days, with only 75% winding up in your account annually, this paper is for you.
For businesses in possession of open customer invoices with aging periods of 30 days or longer, the lag in payments can cause a severe strain on cash flow. Regular operational expenses, payroll, the cost of equipment, and more can eat into capital reserves while waiting for customers to make payments on open invoices. To fix and prevent the buildup of outstanding payments, many practices have started using factoring services.
Factoring is an agreement between a business and a finance company (sometimes referred to as a “factor”), whereby open customer invoices are submitted to the factor in exchange for working capital. Factoring agreements can be arranged in 24 to 72 hours, after which the business can begin submitting invoices. Invoices of any size can be converted to cash within 24 hours, allowing businesses to get the revenue they are owed (less a small administrative fee) and alleviate any strain on cash flow.
Factoring alleviates the burden placed on accounting processes by providing revenue from one centralized source (the factor). No longer is there a need to track aging periods for multiple customers, nor do businesses need to send out reminders for payments or resort to collection agencies. Once invoices are submitted, the factoring services company takes on the responsibility of getting payment from the customers.
Factoring is not debt financing. It is a sale on receivables, rather than a traditional loan, and therefore does not place additional debt on the balance. Additionally, there are no credit checks run on businesses applying for factoring services. Ultimately, factoring allows businesses to preserve their credit ratings, avoid taking on more debt, and it allows them to accumulate capital for business growth. Factoring services are easy to access, especially for practices with invoice aging periods of 30 days or longer.