Companies that work in the business-to-business arena often run into cash flow problems because business clients often pay invoices on net 30 to net 60 days. This is something that few entrepreneurs account for in their financial forecasts – but it can have a real and serious effect.
Often, this problem can affect cash flow when the company is growing quickly and you expect it the least. Basically, you run out of cash because all your money is tied to slow paying invoices.
What is factoring?
Factoring is a type of financing that helps solve the issue of slow paying invoices. It works by financing slow paying invoices. The factoring company provides you with an advance, often a percentage of the gross value of your invoices. This gives your company funds to operate. The transaction concludes once your end customer pays the invoice in full. Companies often factor invoices on a recurring basis until they have built sufficient reserves.
Most factoring companies finance the invoice by ‘buying it’. They often buy invoices in two installments, called the advance and the rebate. The first installment, the advance, covers about 85% of your invoice and is advanced as soon as you send an invoice to your client. The remaining 15%, less a fee, is rebated as a second installment, as soon as your client pays the invoice in full.