Small Business Factoring And Improving Cash Flow With Accounts Receivable

Small Business Factoring Solutions

Cash flow is the life blood of any business, big and small. But smaller businesses tend to experience cash flow difficulties more so than larger businesses. Small business factoring is a source of funding available to improve cash flow problems and keep the business running, even in difficult economic times. When the economic cycle is at a low point, credit tends to become unavailable from traditional business lending institutions, even for midsize to larger companies with solid creditworthiness. If this is the case, what options does a small business have if credit is unavailable? Invoice factoring in many instances is the solution for many hard-pressed businesses.

Small Business Factoring Defined

Most businesses operate on Net 30 terms, meaning payment is expected within 30 days for goods or services given. In a perfect world, the invoice would be paid within the 30 calendar days as specified on the invoice. However, as a business owner, you realize your customers are probably experiencing the same cash flow problems as you so payment of the invoice is often extended for more than 30 days. Larger companies usually have the resources to sustain the payment delays. Small companies don’t.

Small business factoring or invoice factoring as it is primarily called, was created as a financial solution for cash flow problems within the business world. Although small business generally operate on a net 30 form of payment, they seldom can wait thirty days or more to collect these payments from their customers. Small businesses rely on cash flow to pay their own operating expenses: Payroll must be paid, their own vendors expect payment, current work projects must be funded, the light bill, equipment must be maintained and purchased, the list goes on. As you can see, smaller businesses with few financial resources available often have to rely on the one major asset they have - accounts receivable.

Small business factoring is not at all complicated and is easily obtainable by most mid-size to smaller businesses providing they have a solid customer base and no unforeseen obligations on their assets. How small business factoring works is simple. A small business delivers goods or services to one of their customers, an invoice is produced to bill the customer for the goods or service rendered. Normally, the invoice would be sent directly to the customer with payment expected within 30 days. However, in this case the invoice would be sent to a company or individual investor that specializes in this type of funding called the factor or factoring company.

Remember, small business factoring is utilized to improve cash flow and reduce the amount of time it would normally take to receive payment on the invoice. Once the factoring company receives the invoice, the factor will assess the credit worthiness of the customer responsible for paying the invoice and if the customer meets the factor’s credit criteria, they will purchase the invoice from the small business at a discount. In most cases there are two transactions which take place between the factoring company and the small business. The first transaction is usually a payment to the small business for eighty percent of the total amount due on the invoice. This payment provides the much needed cash flow to the business to meet operating expenses on a timely basis. The second transaction, called the reserve, is the remaining twenty percent, less the factoring company’s fees. This second payment is made once the invoice is paid by your customer to the factoring company in full.

The Advantages Of Small Business Factoring

By far the largest advantage associated with small business factoring is improvement of cash flow. Turnaround time from invoice generation to payment of at least eighty percent of the total amount is reduced from weeks to a few days, substantially increasing needed cash flow to keep your business operating at it’s full potential. The scrutinizing financial examination which is normal operating procedure form traditional lending institutions like banks is not necessary. Invoice factoring is easily obtainable, which makes small business factoring ideal for businesses which normally have to wait weeks or even months for payment on an outstanding invoice. Working capital is quickly available, keeping you and your employees in business.

A Note About Small Business Factoring For Investors

Our next article will cover the potential available for cash flow note investors to create a new market and increase their portfolio with small business factoring.