How to Handle a Cash Shortage with Invoice Factoring
Most companies experience cash shortages at one time or another. This article will explain how to address a common problem that causes shortages and will also suggest some strategies to del with them....
Let's look at the most common cash flow problem. In corporate sales it's common to give customers 30 days to pay. Thanks to the economy, most customers have taken longer to pay their invoices. Some can take as long as 60 days to pay. This leaves companies waiting up to two months for payment. In the meantime, the company needs to cover it's expenses regularly. You need to pay rent, vendors and employees. So these payments come out of your reserves, until the invoices pay. The problems start when your reserves dwindle due to growth or slow paying customers.
There are two ways to protect your reserves. One way is to delay expenses so that they come close to matching your invoice payment cycle. The other one is to accelerate invoice payments. Ideally, you want to take both approaches to achieve the most optimal solution.
The most common way to delay expenses is to speak to your own vendors and seek 30 to 60 day terms yourself. If you have been a good client to them, many will be happy to oblige in order to keep your business. However, if you renegotiate payment terms, be sure that you can meet the payments, otherwise you risk losing your vendors. One thing you should avoid at all costs is missing payroll or not paying taxes. If you are at risk of missing payroll, seek the help of an advisor as it's a sure sign your company is in serious trouble.
There are a couple ways you can accelerate your invoice payment cycle. One is to speak to customers and offer them a discount if they pay quickly. It's a common industry practice to offer a 2% discount to customers that pay in 10 days or less. If that approach is not sufficient, you should consider factoring your invoices. Invoice factoring accelerates your revenues by using a financial intermediary who advances you funds against your slow paying invoices. The factoring company holds the invoice until maturity and settles the transaction with your company once the customer pays the invoice in full. The factoring fee is based on the factored volume, the credit quality of the invoices and other variables.
One advantage of factoring is that it's easier to obtain than conventional business financing. The impost important requirement to qualify is to have customers with good commercial credit ratings. It also works well for company whose assets are limited to good quality invoices from credit worthy customers.
Most cash flow shortages require a comprehensive approach of managing both expenses and income in only to ensure the company has sufficient liquidity to cover obligations. Factoring is a tool that can be used to help in this effort.
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