Usually carrying 30 to 60 day payment terms are most sales to commercial clients. This means that as a supplier, you must deliver your products or services now. However, the time given to your client to pay you is 30 to 60 days.
A significant challenge will then be created for owners of small and midsize businesses. It’s actually a simple problem. Your clients want to pay you in 30 to 60 days, but you must pay rent, payroll and your suppliers now. As you can see, the math does not work. An almost impossible situation is what this will lead to unless you have a substantial bank account.
If you are in this situation, it is also very likely that the bank will not be able to help you. You may be aware of the fact that banks only lend to businesses that have significant hard collateral and three years of profitable operations. If you do not qualify for bank financing, your best bet may be to consider factoring.
Factoring is a business financing tool that helps business owners who cannot afford to wait 30 to 60 days to get paid by their commercial customers. The necessary funds to meet payroll, make rent and pay your suppliers on time will be provided to you by factoring.
As opposed to bank financing, it is easy to qualify for factoring. The main requirements are that you have a profitable business with a strong roster of commercial clients. Your best collateral for the factoring company is the invoices from your strong customers.
Factoring is also easy to use. Using factoring will enable you to receive a substantial portion of your billings within a day of invoicing. The time you wait to get paid will be reduced from 60 days to 2 days. Usually structured as a two installment sale of an invoice is the transaction. The first installment is immediately paid to you and this is called the advance. The advance can be anywhere between 70% and 90% of the gross value of the invoice. Held as a reserve to cover disputes and charge backs is the remaining portion which is 10-30%. As soon as the invoice is paid in full, the reserve will be rebated. A small fee will be charged for this advice by the factoring company.
Factoring financing is an ideal tool for companies that are growing and that cannot afford to wait to get paid by the clients. It helps you to stabilize your financial situation and positions you for growth.