Getting a large job with a government agency, a big company or even with a larger sized business is a great opportunity for a small business. However, there is a drawback, and that is the gap or the time between when your business provides the goods or services and when you will be paid.
The Cash Flow Challenge
Most B2B sales or business to government sales or services are going to have at least 30-day terms of payment with many 60 to 90 days out. This means that you have to still make payroll, keep your business operating, buy supplies and materials, pay off your suppliers and vendors, and somehow have the ability to take on new work.
You have the invoice, and you are expecting payment, but that gap is causing a definite shortage in cash flow and your ability to continue to operate and move forward as a business.
Banks won’t recognize that invoice as an asset, but a factoring company will recognize its value. When you choose receivable factoring you aren’t taking out a loan; rather the factoring service is buying those accounts receivables you wish to sell up to 80% of their value.
The Factoring Answer
The factor assumes collections for the invoice, freeing up your staff from this often arduous and time-consuming task. Once the invoice is paid in full the company offering the receivable factoring will deduct their fees from the reserve amount and forward your company the balance.
The initial funding will be advanced within days of your application acceptance. You don’t have to worry about high-interest options for funding such as merchant advances, short-term or cash flow loans, and not need for traditional bank loans that require repayment on both the principle and interest.
Considerations with Factoring
Just as there are different rates and fees charged by banks and other types of financial institutes, there are also different fees and charges by receivable factoring services.
If you are going to choose this option be sure to compare:
- Minimum volume requirements – some factors quote one set of fees and costs that are based on meeting minimum volume requirements for factoring. Dipping below those limits will cost you more in fees.
- Hidden costs and fees – makes sure to read the fine print about fees. Top companies do not have hidden fees, and they don’t charge for application or termination or other types of services required for factoring.
- Advance rates – industry standard for advances is about 80%, be very careful about companies offering less than this.
- Notification – talk to the factor about how they notify your customers you are using a factoring service.
Factoring is a very effective way to manage cash flow slumps in a business. Do your research and find the right receivable factoring service to provide you the financial support you need at a rate that works for your budget.