Companies that sell to commercial clients will typically always get paid for their services or goods on their payment terms, such as net 30 or net 90. This means that they will wait anywhere from 30 to 90 days from the time of invoicing to be able to collect the money they are owed. Most companies can cover various business expenses during this delay by either using their cash reserves or a traditional bank line of credit.
This is a business strategy that usually works pretty well, unless your business has limited reserves and are unable to obtain a line of credit. When banks are going over line of credit applications, most require two to three year’s worth of a company’s financial reports. They also typically require that the company and its owners have substantial assets, usually as collateral.
If your business can’t meet the criteria required, you will most likely be out of luck. Conventional underwriting standards are very strict, but there is a more unconventional financing approach your business can look into that works for a number of different industries.
Most companies cash flow problems stem from not being able to wait up until their payment terms to collect their clients’ payments. Invoice factoring can be used in this situation, as it provides an advance on your slow paying invoices. This gives your business the money it needs cover expenses while waiting to get paid by clients.
There are two main advantages to using factoring to fund your business. One advantage is that you can use the credit quality of your clients to your advantage. During an invoice factoring transaction, the funding company buys your invoices at a discount, with the expectation that your clients will pay them in 30 to 90 days. If your clients have good credit, the factoring company will be more likely to buy the invoice. If a smaller company whose biggest asset is an excellent client list, invoice financing can be a great option for them. The second advantage is that your funding line can grow with your sales. This funding line is typically determined by the size of your invoices along with the creditworthiness of your customers. Using invoice factoring not only get your business the money it needs quickly and easily, but it allows smaller business room to grow.