How Factoring Receivables Can Help Your Business Grow
Do you have commercial or government clients? Working with commercial and government clients can be very profitable. However, these clients also tend to pay invoices in 30 to 60 days, which can drain your company’s working capital. Many times, these great but slow paying customers can drag your company’s performance down.
If your working capital is tied in slow paying customers, eventually you’ll have to start turning away new sales. Even worse, you may miss payroll or key supplier payments. Before long your company will be stuck in neutral or about to enter a death spiral. The solution, of course, is to obtain some working capital.
Going to the bank for business financing (e.g. a working capital business loan) is tricky and won’t work for most business owners. Banks usually require 3 years worth of financial statements, detailed business plans and will take months to make a decision. In the end, you may – or may not – get the capital you need. However, if your biggest challenge is that your customers take up to 60 days to pay their invoices, you should consider factoring your receivables.
Factoring receivables enables you get an advance on your slow paying invoices. This provides you with the necessary working capital to make new sales, meet payroll and pay rent. And as opposed to conventional bank financing, invoice factoring is easy to obtain and quick to set up.
Factoring financing is easy to use. It works like this:
1. You deliver your product/service to your customer
2. You submit the invoice to the factoring company for financing
3. The factoring company advances you up to 85% of the invoice as the first payment
4. Once your customer pays for the invoice, the remaining 15% is advanced, less a small service fee
Factoring services fees can range from 1.5% to 3% per month, depending on your business volume and other criteria.
There are a number of advantages to using factoring. For starters, it’s relatively easy to qualify for the service. The biggest requirements are that you work with reputable customers and run a good business. And it’s also easy to setup. Usually you can get financing in just a few days. All of these features make receivables factoring a great alternative for new and established companies.