How To Fix Cash Flow Problems From Slow Paying Clients

Large companies usually pay their invoices in 30 to 45 days. It's a standard practice in which few companies make any exceptions. Lately, due to the past recession, companies have started lengthening their payment times. Many now pay their invoices in 60 or even 80 days. This has caused a number of problems to small business owners who depend on timely payments to be able to run their companies.

Why do many large companies take so long to pay their invoices? On the administrative side, paying an invoice usually requires that paperwork be reviewed by several people and that deliveries be checked. Furthermore, most invoice payments need to be approved by several layers of management. given all the moving parts, the process of getting all the proper paperwork and signatures can actually take a couple of weeks. However, there is another reason why companies take so long to pay invoices.

One of the main advantages of paying invoices in 30 to 60 (or more) days is that the company gets to use your product for free for a couple of months. One could argue that it's the equivalent of getting an loan from you - the supplier. Delaying payments basically gives your client use of the cash that otherwise would have been used to pay you. From this perspective, it's obvious why they chose to pay invoices in 30, 60 or even 90 days. This strengthens their cash flow.

But what can you do if you need the money sooner? Asking for a quick payment seldom helps, although sometimes you can get companies to pay you in about 10 days if you offer them a 2% discount. This is seldom reliable though. Another alternative is to use business financing. Although business loans can be used to solve cash flow problems, a better solution may be to use invoice factoring. Actually, invoice factoring is specifically designed to solve the problem from slow (but solid) paying customers. It advances funds on your slow paying invoices, providing the funds you need to cover operations. The transaction with the factoring company is settled once the client pays the invoice in full. Most factoring companies will advance funds based on the credit quality of your clients, provided your invoices are free of liens, judgments and other potential encumbrances.

Factoring can be an effective solution for companies that have good potential but cannot afford to wait for their clients to pay.