Every day many business owners hit a wall. That wall prevents them from growing their business, or at least, severely limits the speed at which they can grow their companies. Sometimes, and especially for small and mid size businesses, the wall appears to be insurmountable. That wall is lack of working capital. Let’s take a look at the most common source of working capital problems: extending payment terms to customers.

There are few things that small business owners hate to hear more than a customer utter the words, “We’ll be happy to do business with you. However we pay net 45 days”. As is well known, commercial clients like to pay their invoices in 30 to 45 days. As a business owner, you are expected to go through the trouble and expense of delivering your product or service on time… only to then wait 30 to 60 days to get paid.

It does not take a long time before the business has a lot of money tied up in their unpaid invoices – or accounts receivable. At this point the business may have more money in unpaid invoices than actual cash in the bank. When they reach the breaking point, they hit the wall. They can no longer supply new products until old invoices pay. Sometimes it’s even worse. The business may stop operating until old invoices pay. Payroll is missed. Key suppliers are not paid. Unless this is fixed quickly, the business will certainly face major problems. If you hit the wall, there are two options. Either you step on the brake and stop growing your business, which means your competition gets the contracts, or you blast through the wall using some form of financing. Invoice factoring can help you do just that.

Your unpaid invoices are an asset – really!

Companies that hit the wall have a great asset that can be turned into immediate funds. They just don’t know it. This asset is their unpaid invoices from credit worthy clients. Let me give you an example. Let’s say that you have a $10,000 invoice from General Electric payable in 45 days. Do you think GE will pay? Isn’t that invoice almost as good as money? Well, of course. GE is arguably one of the best and most financially stable companies on the planet. Most people would certainly consider that invoice to be “almost cash”. Unfortunately, banks will seldom provide you any financing that relies on that “almost cash”. However, there is a solution that relies solely on the power of your unpaid invoices. It is called factoring.

Invoice factoring. Financing your business without debt

Invoice factoring allows you to turn your slow paying invoices from good customers into immediate cash. It’s a very simple transaction in which you trade an invoice – “almost cash” – for actual cash. Basically, the factoring company provides financing solely on the power of your soon to be paid invoices.

Provided that you have good customers, you can repeat this process for every invoice you have, almost indefinitely. If you sell products to good credit worthy customers, a factoring company will gladly buy your invoices. There are no limits, except how much you can sell.

One important thing to know about factoring is that it doesn’t generate debt. The factor does not loan you money for your invoices. It buys them outright from you at a small discount. Since factoring is not a loan, qualifying for it is easy and your financial statements look cleaner. You just need a well-run business and great customers.

Who is a good candidate for factoring?

Factoring is a great resource for companies that have great paying – albeit slow paying - customers. To work well, the company should have profit margins of at least 15%. However, higher margins of 25% - 50% are more desirable.

Factoring works well for companies that have hit the wall and are turning away new business opportunities because of lack of money. In these instances, factoring will almost always allow you to grow your company immediately and will more than pay for itself.

Factoring works well for almost any industry. Some very successful staffing companies, trucking companies, IT consultancies, construction firms, manufacturers and service providers have used factoring to dramatically grow their businesses.

A sample factoring transaction

Let’s take a look at a sample invoice factoring transaction. This will help you better understand how this financial tool works. Let’s say that you have a company, called Super Services Inc. Super Services sells products to two clients. The clients are Company A and Company B. The factoring would look as follows:

1. Super Services delivers its products to Company A and Company B
2. Super Services sends Company A and Company B an invoice for its products. At the same time, it sends copies of the invoices to factor
3. The factoring company receives the invoices and advances funds to Super Services. Super Services can use the funds to grow the business
4. The factoring company waits to get paid. Once it gets paid, the transaction is settled

As you can see, invoice factoring is a fairly straightforward tool that allows business owners to capitalize on their most precious asset – their invoices.

Copyright © 2005 Commercial Capital LLC All rights reserved. This article may be reprinted, provided the resource box is included with live links.

Invoice Factoring Group

Invoice Factoring Group and its small business factoring subsidiary can provide you with factoring quotes at no cost to you. Marco Terry, its president, can be reached at 866-730-1922.