It’s normal and expected for companies to extend credit to customers for at least 30 days but sometimes for 90 days or longer. This helps to secure customers from the competition and build revenue in the long-term. Unfortunately, it can leave your business with significant cash flow problems until customers start paying their invoices. Accounts receiving financing, also known as invoice factoring, can be the ideal solution to this problem.
Understanding Accounts Receivable Financing
Perhaps some of your customers take a long time to pay but always pay on time and have high invoice totals. You can use this to your advantage by selling those outstanding invoices to a company that offers accounts receivable financing. The buyer that purchases the invoices typically holds a percentage of it in an escrow account until collecting full payment from your customer. The average escrow amount is 10 to 30 percent. You receive immediate access to cash to meet more immediate needs such as rent and payroll.
Choose Invoices from Your Most Creditworthy Customers
This option can be especially attractive to newer business owners and those who have had credit issues in the past. That is because the accounts receivable financing company bases the lending decision on your customer’s creditworthiness and not your own. If the customer fails to pay on time, check your agreement with the factoring company to see who is responsible for collection efforts. Keep in mind that the customer will pay the company that purchased the invoices and not remit payments to your business.
Invoice Factoring Can Help New Companies Become Better Established
It can be difficult to compete as a start-up without a lot of cash. While this option helps level the playing field, you should not rely on it too heavily as the fees will eat into your profit margin. It should be easier to stay above water financially once invoice payments start coming in regularly.
Is accounts receivable financing right for your business? Please contact Sudden Rivers Capital Corp today to learn more or start an application.