Using Your Slow Paying Invoices to Finance Your Company

One of the more troubling by-products of the recent credit crunch is that many companies implemented immediate measures to conserve cash. One of those measures was increasing how long they take to pay invoices. In the past, most commercial transactions were paid on net 30 terms. That meant that the customer had 30 days to pay their invoice. Now, most customers are paying their invoices in 45 to 60 days. Some are taking as long as 90 days to pay. This has put small and medium sized companies at a disadvantage because few can afford to wait that long to get paid and may need to be paid sooner to be able to meet obligations.

One way to protect your company against this situation is to start building a cash cushion that can be used to cover operational expenses while waiting to be paid. Another alternative is to offer incentives, such as discounts, to customers that agree to pay quickly. Offering a 2% discount for a payment in 10 days is a common practice that can be used to enhance cash flow.

Another alternative is to use a business financing tool called factoring in order to quickly monetize your slow paying invoices. Invoice financing involves using a financial intermediary between your company and your customer. You sell your invoice to the factoring company, who advances you funds. The factoring company then holds the invoice until maturity and settles the transaction when the customer pays in full.

Most factoring financing transactions are structured as the purchase of an invoice, which is an asset, payable in two installments. The first installment is called the advance and is about 80% of the gross value of the invoice. The second installment, called the rebate, covers the remaining 20% (less a service fee) and is paid once your customer pays the invoice in full.

An important advantage of factoring financing is that is more accessible than other forms of financing. Most factoring companies don't require that clients have substantial assets. The most important requirement is that the client must do business with credit worthy customers. This feature makes factoring an easily accessible solution for small and midsized companies.

Another important feature of factoring is that it can be deployed quickly. While most conventional business financing programs take a couple months to set up, most factoring plans can be deployed in a week or two.

One of the biggest advantages of factoring is that it can monetize slow paying invoices. This makes it an ideal solution for companies that can't afford to wait up to 60 days to get paid by customers.