Using Accounts Receivable Factoring To Enhance Your Cash Flow

Managing your company's cash flow can be a tedious but critical task. If you operate your business like most other managers, you probably pay your supplier invoices in about 30 days. Likewise, your clients probably pay your invoices in about 30 days as well. The problem, of course, is that this process seldom works like clockwork. Inevitably, this leads to cash flow problems.


Experts recommend that company's keep enough funds to cover about 5 months worth of operating expenses . This works very well in theory, but is almost never done in practice. Few small and midsized companies have the resources to keep such a large cushion of funds at the bank. Many companies, especially small businesses, operate at the edge and have less than 4 weeks worth of operating expenses set up as a reserve. This can create a critical situation should cash flow problems arise.


One way to solve this problem is to get business financing and use it to use it as a reserve. Getting a business loan can be a major challenge for small companies who lack the assets to qualify. Most conventional business loans require a rigorous due diligence and can take months to close. However, if the company has cash flow problems, a better solution could be to use accounts receivable factoring.

Accounts receivable factoring allows you to convert a large portion of your accounts receivable into cash very quickly. This provides the funds you need to pay suppliers and smooths out your cash flow by accelerating receipt of funds. Factoring works by having an intermediary factoring company advance funds against your invoices while they wait to get paid by your client.

One advantage of working with factoring companies is that they focus mainly on the credit quality of the receivables they finance. They consider accounts receivable to be the most important collateral. This makes accounts receivable factoring and accessible solution to many small and mid sized companies.

Accounts receivable factoring is an ideal solution for companies whose biggest challenge is that they cannot afford for their clients to pay their invoices.