Fixing Your Cash Flow with Accounts Receivable Factoring

Most companies that have weathered the recession have been left in a shaky financial position - where that can't completely capitalize the current economic recovery. For many companies, cash flow has degraded to the point where they are living from client payment to client payment. For example, most commercial invoices used to get paid in 30 days. Now it usually takes 45 to 65 days to get paid. Sometimes even longer.

Although payments seem to take longer to come by, expenses seem to pile on very quickly. You have suppliers to pay. Payroll. Utilities. Office expenses. And the list goes on. This creates a serious gap in your company's cash flow. And this gap can prevent your company from growing once the economy improves and sales start increasing.

One way to fix this problem is to ask clients to pay their invoices faster. However, this seldom works as most clients are paying slowly because they have problems of their own. The alternative solution is to get business financing. Few companies are able to obtain business loans in the current environment though. Institutions are only lending money to companies that have impeccable financial statements, substantial assets, years of experience and well seasoned management. And even if you meet this criteria, qualifying for a business loan is far from certain.

A third approach is to fix the cash flow problem using a/r factoring. This solution reduces the cash flow gap by financing your invoices, and therefore reducing the amount of time it takes you to receive payments. The transaction uses a third party financing company referred to as a factoring company.

The transaction mechanics are fairly simple. Once you have an invoice from a credit qualified client, you sell it to the factoring company, which pays you for it in a few days. The factoring company will buy your accounts receivable in two payments. The first payment is usually for 80% of the invoice. You get the remaining 20%, less a factoring fee, once your client pays the invoice in full.

Qualifying for a/r factoring is easier than qualifying for conventional business financing. The most important requirement is that your clients need to have solid commercial credit.