subject: Preventing Cash Flow Problems By Factoring Invoices [print this page] Most growing companies run into cash flow problems at one time or another. The recent recession has made this problem all too common, forcing managers to find strategies to cope with these problems. Many cash flow problems are caused by customers delaying their invoice payments. In the recent past, most commercial customers paid their invoices in 30 to 45 days. As conditions deteriorated, they started paying at slower rates, sometimes taking up to 70 days to pay.
Slowing payments can have serious repercussions for the business. At first, you can counter their effects by paying your own suppliers at a slower rate. If left unchecked, it may jeopardize your ability to meet critical payments - like payroll. One you are at risk of missing payroll the business is in grave danger.
One way to deal with this problems is to build a cash reserve. This is easier said than done as few small companies have the resources to build a reserve. Another alternative is to use business financing to cover the gap.
Using a business loan to cover expenses while waiting to get paid by clients can work if used properly. Most business loans are designed to buy goods and are paid on an amortized schedule. This makes them cumbersome to use if you are only interested in covering expenses while waiting to get paid. A better solution would be a revolving line of credit. The problem is that all these solutions are subject to strict banking underwriting standards, and are a viable option for companies with substantial assets.
There is a better alternative though. It's designed specifically to solve the cash flow problems generated by slow paying clients. The solution is called invoice factoring. An invoice factoring program will give you a funds advance on your slow paying invoice. This enables you to cover business expenses while waiting for your clients to pay. Once your client pays, the transaction is settled by the factoring company.
As opposed to most conventional business financing products, invoice factoring is relatively easy to qualify for. You need to have invoices from credit worthy clients that are free of encumbrances and liens. This makes it an ideal solution for small companies whose biggest assets is a list of solid clients.
