How to Use Factoring to Handle Cash Shortages

How to Use Factoring to Handle Cash Shortages

Most companies, even those with extremely skilled personnel, sometimes experience cash flow difficulties. These are often caused by the necessity of offering payment terms that may vary from 30 to 60 days or even longer. One solution is to build up cash reserves, which can be problematic for struggling businesses, and another is to offer rewards to your clients for quicker payments. More and more companies, though, are using invoice factoring to strengthen their cash flow. Here is some information on how this method of funding works.

What Factoring Is

When you factor in unpaid accounts receivable, you allow a financing company to purchase them in exchange for immediate cash to handle your expenses. You can qualify if you provide products or services to government agencies or businesses on terms of up to 90 days, the invoices are lien-free, and your company has no legal or tax problems.

Factoring Basics

When you sell an invoice to a factoring company, you quickly receive an advance of around 80 percent of the value of the receivable. This allows you to handle your important expenses such as rent, employee salaries, equipment, inventory, and other needs. After your clients have paid in full, you receive the balance of the payment minus the financing fee.

Benefits of Factoring

Factoring helps you to hold onto your customers by offering them the payment terms they expect. It strengthens your cash flow so that you have the funding you need to run and grow your business. It is easy to qualify for, even if your company’s credit is not the best, provided you have creditworthy clients. Additionally, you can obtain financing quickly. The only collateral you require is the unpaid accounts receivable. As your business grows, the factoring line can grow with it because it is linked to the number of sales you make.

For more advice about using invoice factoring to help fund your business, get in touch with Skogen Capital Lending.