Cash flow is critical for business. How do you get cash for your small business when money for lending is tight and banks are hesitant to extend funding? Consider an alternative financing method that has gained popularity with small businesses – Accounts receivable factoring is a great, and often overlooked method to get working capital quickly.
Factoring involves selling accounts receivable to an outside company. The factoring company buys the receivables as an advance. Typically, the amount paid is a percentage of the total invoice. Although there is an expense involved, and you will receive less than 100% of the outstanding invoice, the advantage is to get funding quickly and avoid penalties that could accrue on missed opportunities or delayed payments due to cash flow.
Business relies on working capital for operating expense, procuring raw materials, payroll, and expansion. When slow receivables hold business back from growth, factoring may be an option to smooth seasonal cycles or slow payment situations by customers. Factoring is a way to avoid slow payment of 30 to 60 days. It’s important to note that your customer’s credit history and payment history will impact the fee structure related to the transaction.
If you do make the decision to look into factoring, you can be selective with which invoices you elect to factor. If you have customers who are reliably on time and quick payers, it may be less desirable to involve a factor.
By understanding that you have options and understanding your customer’s pay history, you can determine whether factoring is a beneficial opportunity to improve cash flow and optimize your profits.