How Can Factoring Help Businesses Struggling to Deal with Unpaid Invoices?
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How Can Factoring Help Businesses Struggling to Deal with Unpaid Invoices?

by Peter Amundson

It is customary in business to offer long payment terms (30, 60, or 90 days) to bulk buyers and VIP customers. It is a benefit that many companies and bulk buyers look for when choosing suppliers. Unfortunately, outstanding or unpaid invoices create bubbles in a business’s finances. Although they are recorded separately as accrued revenue, the fact remains that it is money the business needs but cannot access yet.  

Having far too many unpaid invoices can result in a negative cash flow: a situation wherein a business spends more money than it earns in a given period. There are many ways to turn things around to increase incoming money and reduce outgoing funds:

  • Apply for invoice factoring
  • Apply for a loan
  • Increase sales
  • Invest
  • Renegotiate and shorten payment terms (e.g., from 30 to 15 days)
  • Reduce operating expenses
  • Follow-up on outstanding payments
  • Hire a debt collector

These are good strategies to prevent cash flow stagnancy when you have pending invoices. However, invoice factoring would be the best option if your business is struggling to make payroll and pay suppliers on time.

The Advantages of Factoring for Struggling Businesses

Invoice factoring can offer a lifeline to businesses that are short in operating capital and whose operations are in danger of stopping when the petty cash runs out. We must stress, however, that unlike conventional business loans for which everyone may apply, factoring only works for businesses with outstanding invoices. 

Here are the reasons why factoring is ideal when accounts receivables are the cause of your cash flow problems:

You can receive working capital in one to two days.

When you work with an established factoring company like Business Factors & Finance, you can get your capital as quickly as two days. The quick turnaround is the primary reason businesses factor their invoices instead of the choices listed above. 

In comparison, payment follow-ups and debt collection cannot guarantee an immediate payment or timely payments moving forward. Meanwhile, renegotiating payment terms to make them shorter might lose you more clients and increasing sales, reaping returns from investments, and cutting operating expenses take longer to implement. 

Applying for a business loan is a plausible option, but only if your credit score is high enough to meet the cutoff and you can meet other requirements. And even if your bank accepts your application, they can take weeks to underwrite, approve, and finance your loan. That leaves invoice factoring as the most promising option for struggling businesses. 

It doesn’t matter if you have a low credit score.

Factoring companies won’t look into your business’s credit history. Instead, they will screen your customers’ credit scores and trustworthiness. As long as you have reliable customers who habitually pay within the terms of their contract, you can get approved for factoring.  

With the burden of trustworthiness transferred to your customers, you don’t have to worry about having a poor credit score, or that business was in the red in the last couple of years. This is also good news for startups and small businesses that have yet to build a credit history.

You can apply online.

Another draw of factoring is convenience. Many factoring companies accept online applications and can communicate with clients from around the country via phone calls and email. And since there’s no extensive paperwork required for the application, there’s little need for you to make a personal appearance at a factoring office. 

You’re not getting a loan, so your business doesn’t incur debts.

Invoice factoring is technically not a loan because the financing you receive is an advance on your accounts receivables. When your customers pay, the money goes to the factoring company, which will then deduct a small percentage as their fee.

Factoring is affordable.

Now that we’re on the subject, factoring companies typically charge a small percentage of the invoice total as payment for their services. Depending on many factors and your contract agreement, it can be a monthly or weekly fee. 

For example, a factoring company that advances 85 percent of a $100,000 invoice and holds the remaining 15 percent in reserve may charge a 2.5% monthly fee or $2,500 per month. If the customer pays after one month, the business will only pay $2,500. If the payment comes through after two months, the fee is $5,000. 

In this example, the business receives $85,000 in advance and gets back the $15,000 held in reserve after paying $2,500-$5,000 in fees. Thanks to factoring, the business can replenish its dwindling cash flow and meet all financial obligations without tying up future revenues in loan repayments.

Reliable Financing for Businesses with Accounts Receivables

To sum up, factoring for struggling businesses is a good strategy for obtaining working capital without incurring debts that can take a year or more to repay. It is also the best option for businesses that urgently need cash. And with application requirements that are laxer than a bank’s, factoring is probably the only answer for companies recovering from financial crises. 

If you have more questions about invoice factoring, you may call Business Factors & Finance at (800) 672-3844 or reach out via our contact page.

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About the Author:

author image Since 1991 I specialize in Invoice Factoring, PO financing and ABL facilities. I currently work internationally with companies in the US and Canada via our internet marketing division. Specialties: Accounts Receivable Factoring and Payroll Funding for Manufacturing, Oil & Gas, Telecommunications, Wholesale Trade Distribution, Staffing and Transportation. I always enjoy helping companies rise to the next level of success.

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