New and growing companies can benefit greatly from invoice factoring, also referred to as invoice financing or accounts receivable factoring. Many companies can’t qualify for traditional bank loans. Even if a company qualifies for a bank loan, factoring may be a much better option.
When businesses sell goods or services to other businesses, it often results in a delay of payment due to trade credit terms. Most businesses, especially large ones, don’t pay an invoice immediately upon receiving it (i.e. COD or cash on delivery). They will determine when they will pay your based on their typical credit terms. Businesses will often offer their customers a discount to encourage them to pay quicker.
Trade Credit Terms
Credit terms can be net-30, net-60 or any other period of days. Net-30 means the payment is due in 30 days after the item is purchased, or service is rendered. The 30 days include weekends and holidays. If the customer pays within a shorter time period, usually in 15 days or less, then the company often gets an early payment discount. For example, a business might offer a 2% discount if the customer pays within 15 days. This would be referred to as 2/15 net 30 terms of credit.
Factoring provides you cash quickly, often in a matter of days, after completing the sale of goods or services. Once your sale is complete, you just send your invoice to your factoring company and they will advance you the funds immediately. They typically advance 80 to 90% of the invoice amount and hold the remainder as a reserve until your customer pays the invoice. You don’t have to wait the full 30 days on net-30 terms or 60 days on net-60 terms.
Often, large companies don’t pay within the terms of their credit terms agreement. This makes invoice factoring even more attractive. If a large customer doesn’t pay for 45 days on net-30 day terms, then you’re out of cash for 45 days. That’s a long time to have cash sitting in your accounts receivables.
Invoice factoring is an especially attractive source of working capital for these types of businesses:
- Rapid sales growth; early-stage companies
- Seasonal volume activity with order spikes
- Don’t qualify for traditional bank financing
Other Factoring Benefits
With factoring, you don’t have the overhead cost of an accounts receivable department. You also receive credit services that protect you from bad debt losses. Factoring lets you focus on your business operations, not the collection of receivables.
Invoice factoring offers many benefits for small businesses:
- Provide immediate cash flow
- Finance working capital needs
- Fund payroll and tax liabilities
- Purchase inventory for increased sales
- Receive trade discounts on payables
- Receive instant cash for one or two major customers
Mazon Associates is a Dallas factoring company that serves many industries including staffing, oilfield services, business services and transportation. The friendly folks at Mazon Associates are professional and take an interest in each of their clients. To discuss your payroll funding needs, please call Lisa Hultz of Mazon Associates at 800-442-2740. Lisa is the sales and marketing representative for Mazon Associates.