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Waiting up to 60 days to get invoices paid by customers can be a major challenge for distributors and wholesalers. Many times they will have to pay their suppliers before they can collect on their invoices, created a potential cash flow problem. This problem affects smaller distributors more often because they have not had the opportunity to build a cash reserve.

Most companies try to solve this problem by negotiating better payment terms with their suppliers, while at the same time offering quick payment discounts to their customers. This solution will work for many companies but will not always fix the root problem. In the end, a late customer payment may still throw the business into a tail spin. A better solution may be to accelerate your revenues from slow paying invoices using factoring.

Factoring accelerates your revenues due from slow paying invoices, providing the funds you need to pay suppliers and cover other critical expenses. It gives you predictable cash flow, enabling you to manage your business more effectively.  It works by partnering with a financial intermediary – called a factoring company – that advances funds for your invoices and uses your them as collateral. The transaction closes once your customer pays the invoice in full.

One important advantage of invoice factoring is that it’s easier to obtain than other business financing solutions. The most important criteria to qualify is the credit worthiness of your customers. Aside from that, your invoices must be free of encumbrances from legal or tax problems. This makes invoice factoring an ideal solution for distributors and wholesalers who have growth potential that has been burdened by cash flow problems.

The automotive industry has gone through quite a bit of turmoil in recent years putting a number of companies in financial difficulties.  During the turmoil, many automotive supply companies saw their cash flows worsen. In part, this happened because companies started paying their invoices more slowly. Invoices that were paid in 30 days started taking 60 or even 90 days to get paid. This had a ripple effect across the whole supply chain as everyone started paying their own invoices slowly. Small supply companies with little cash reserves where most affected by these problems.

One way to deal with this problem is to offer your client a discount in exchange for a quick payment. It’s common for companies to offer a 2% discount in exchange for a quick payment. This can work well if your clients are willing to take the discount – but ultimately it’s their choice. Ultimately, this can still lead to unpredictable cash flow.

Another alternative that has been gaining popularity is  factoring – which can help solve some of the cash flow problems that are created by slow paying customers. Factoring accelerates your revenues from slow paying invoices, which provides your company with the needed liquidity to cover your operating expenses. And since factoring is tied to your revenues, the financing amount can increase with your sales, provided your clients are credit worthy companies.

Most invoice factoring transactions fund invoices in two stages. The first funding is called the advance and covers up to 85% of the invoice. These funds are remitted as soon as the work for the invoice is completed. The second funding happens as soon as your customer pays the invoice in full. This covers any remaining funds, less the invoice factoring fee.

One of the advantages of factoring in Canada is that it’s a lot easier to obtain than conventional institutional financing. Most factoring companies look for clients that meet three criteria:

1. They must have solid and credit worthy customers
2. They must NOT have legal problems
3. They must NOT have tax problems

Easy qualification and flexibility make factoring an ideal solution for small and medium sized auto supply companies that have substantial opportunities, but constrained cash flows  due to slow paying customers.

Most consulting companies, being knowledge based organizations, have very decent profit margins and can accrue substantial revenues if marketed correctly. At the same time, these companies tend to have cash flow problems. This is because they have payroll liabilities that happen regularly. At the same time, most customers pay their invoices in 30 to 60 days. This combination of constant expenses and slow revenues can create a problem if not managed correctly.

One simple way to handle this problem is to build cash reserves that can be used to cover company expenses. This is a prudent approach, however we find that few business owners have extra funds to build a reserve. They tend to invest all their funds into growing the business.

Another approach is to use a factoring financing line to accelerate your revenue, which will minimize the challenges of slow paying customers. Factoring offers a simple solution to this problem. A factoring company advances funds to you using your invoices to credit worthy customers as collateral. You get immediate funds to run your consulting business while the factoring company holds the invoices. The transaction is settled once your customer pays the invoices in full.

One of the advantages of working with a factoring company is that their products are usually easier to qualify for than conventional bank financing. The biggest requirement is that your customers need to have good credit, which makes sense since your invoices are the collateral for the transaction. Aside from that, your company needs to be free of legal and tax problems. Another advantage of invoice factoring is that it can grow with your company – provided that you are billing hours to a reputable credit worthy company. This feature allows you to grow your staff on consultants without the usual concerns about how to meet payroll. It’s flexibility and ease of qualification make factoring an ideal solution for small and medium sized consulting companies.

Invoice factoring is a form of financing that has been gaining substantial traction in the past few years. It solves a common business problem – cash flow shortages created by slow paying customers. In the commercial world, it’s common for customers to pay their invoices on net 30 to net 60 days. However, many small businesses cannot wait that long to get paid by their customers. They need the funds to meet current business expenses such as supplier payments and payroll.

Invoice factoring helps solve this problem in a simple way. A factoring company gives your company an advance based on the value of your soon to be paid invoices, and keeps the invoices as collateral. The transaction is settled once your customer pays the invoice in full. This provides a simple solution, accelerating you revenues and providing the funds you need to meet business expenses and pursue new opportunities.

One of the advantages of factoring is that it’s relatively easy to obtain – especially when compared to conventional business loans. Since the factoring company is advancing funds against your invoices, it’s important that your customers have good commercial credit. Aside from that, your company should be free of legal and tax problems. But, unlike institutions, most factoring companies will not require additional collateral aside from your invoices. This makes it an ideal solution for small and medium sized companies that have cash flow problems created by slow paying customers.

Some times, clients are in a big hurry and ask whether an invoice can be factored before the have finished providing the service or before the product is delivered. In other words, they need funding before they are in a position to invoice the client. Unfortunately, this is something that cannot be done. By definition, invoice factoring requires an invoice as collateral.

One way to understand this is to look at this situation from the factoring company’s point of view. They are financing your company based on the credit strength of your invoices. Your invoices from credit worthy customers are their main collateral. To make matters more complicated, the factoring company would be very concerned about what would happened, if for some unexpected reason, the work/product was not delivered. This would create some complex problems for both companies and could have important repercussions in your factoring relationship.

If you are faced with this problem, there is one possible solution though. The solution is to work with your customer to allow you to invoice on stages. This way, you can invoice for product or work that has been delivered up to this point. By doing this, you are creating an invoice that can usually be factored. But as you can see, this strategy requires that your customer agrees to a new billing schedule, which can be difficult if the project has already started. Ideally, you want to try to forecast your cash flow needs before the project starts and negotiate the billing schedule before the project starts.

Most factoring companies request an invoice aging report as part of their application package. Surprisingly, a number of companies do not have this very useful report readily available. This report shows outstanding invoices, and groups them in date categories. The categories are usually “Current”, “1 – 30″, “31 – 60″, “61 – 90″  and ” > 90″. Current, lists invoices that are within terms.  1 – 30, lists  invoices that are 1 to 30 days past due. 31 – 60, lists invoices that are 31 days to 60 days past due. And so on.

Although the structure of this reports varies by accounting program, the all have a similar format. And they are incredibly useful. As a business owner, it gives you a glimpse of which invoices are past due and for how long, enabling you to better focus your collections efforts. Many cash flow problems could be averted if companies simply spent more time managing their receivables and collections.

On the other hand, there are companies that are good customers but still pay past terms. They may pay 10 or 30 days past terms, creating cash flow problems. In those instances, factoring may help you by accelerating the funds due from those invoices.

However, most factoring companies will ask for a copy of your accounts receivable aging report as part of the application request. Why? For the same reason you should check your report regularly. It gives them a glimpse of your outstanding receivables and their quality. Although credit reports are the best way to determine credit quality, most factoring companies assume that companies that are 60 to 90 days won’t be factorable (though this varies and can be further determined by looking at commercial credit reports).

Ultimately, the accounts receivable aging reports is a useful tool to run your business – and to help secure business financing.

One of the most challenging situations a business owner can run into is having a lot of invoices that will be paid in 60 days, a lot of expenses that need to be paid now, and not enough cash in the bank to pay the bills. This is a very common situation for small and midsized businesses that have to give their clients 30 to pay their invoices. Sooner or later, they run into cash flow problems – especially if the company is growing.

In this case, the biggest risk is not having enough funds in the bank to cover payroll. A business owner can delay paying their vendors, but not paying employees is usually an unacceptable option. Usually, missing payroll can signal the beginning of the end since few companies can recover from that.

One solution is to accelerate customer payments. A way accomplish this is to offer customers a discount if they pay quickly. A common rule is to offer a 2% discount if the customer pays in 10 days or less. This strategy is well know and usually works and will help you build a cash reserve. The problem is that this it will leave you at the mercy of your customers who may chose to opt out of the discount at any time.

Many business owners require both quick payments and predictable cash flow. In those cases, the best solution can be to use business financing to cover the cash flow gap. A solution that has been gaining traction in the past years is invoice factoring. Factoring can help cash flow by reducing the length of time it takes you to get paid for your invoice from 30 days to just a couple of days. It works by introducing an intermediary called a factoring company who advances your company funds against your invoices. The factoring company holds the invoice and then waits until your customer pays ay which time the transaction is settled.

Most invoice factoring transactions as structured as two payments. The first payment, usually 80% of the gross invoice value, is given as soon as the invoice is sent to the factoring company. The remaining 20%, less a service fee, is paid as a second installment once the customer pays the invoice. The service fee will vary and be based on the factoring volume and credit quality of your invoices.

One of the advantages of factoring is that it’s easier to obtain that other forms of funding. Most factoring companies look for clients that have customers with good commercial credit ratings. A small company whose biggest asset is a roaster of good customers would be a good candidate for this type of financing.

Factoring is a great solution for companies whose biggest problem is that they can’t afford to wait 30 to 60 days to get paid by their clients.