Your client has approved your work, the goods have been shipped, the project is finished, service has been provided, and now you’re waiting to be paid. And waiting…and waiting. Meanwhile, your suppliers and subcontractors want their money right away. Sound familiar? If so, you’re not alone. Cash flow issues like these can cause significant problems for businesses both large and small, especially if the business is growing rapidly.
One solution to this problem is factoring, often called accounts receivable financing. In factoring, a business sells its outstanding invoices (receivables) to a financing company called a factor. The factor provides immediate cash, collects the money from your customers, and quickly advances you the remaining percentage of the invoice amount, less a discount fee. Advances usually range from 80 percent to 95 percent of the invoice amount depending on the industry, your customers’ credit rating, and other considerations.
Once you set up an account with a factor, each time you send invoices for factoring, you’ll receive your advance very quickly, sometimes that same day.
Why factor? Getting cash right away can enable your company to pay day-to-day bills or even expand operations instead of having to wait for slow payers. You can keep in good standing with vendors and subcontractors by paying them quickly, and may even be able to take advantage of discounts for prompt payment.
You can factor some or all of your accounts receivable. For example, you may choose to factor only those invoices from customers you know will take longer to pay, like government agencies. And, while traditional bank loans have an upper limit based on your company’s credit rating and history, there’s no limit to the amount of receivables you can factor.
Factoring can be a good solution for businesses that haven’t yet established business credit, since it’s based on customers’ credit rating, not just the credit status of the start-up. While it’s more popular with small businesses, many large businesses also use factoring to help with cash flow on an ongoing basis.
Since factors do assist with the customer collections, this may free up time you’d spend on processing payments, letting you spend your time on more important issues, like developing more business or making long-range plans for your company.
Ask your banker about the benefits of factoring. Then decide if it can help your company solve cash flow challenges and get the money you need to operate successfully and make plans for growth.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.