Extend Customers Net 30 to Net 90 with Non-Recourse Invoice Factoring
Offer Credit Terms through A/R Financing
Can I safely offer my clients net 60 or net 90 days to pay?
For many business owners, waiting for payment after service completion can be up to 60 or 90-days. Small companies with commercial clients often are required to offer extended credit or payment terms. In addition, large S&P 500 companies are now dictating terms of net-90 if you want to do business with them. What can an under-capitalized business do?
The major downfall of offering credit terms to your customers is the lack of cash for the provider or supplier. In particular, small businesses generally do not have sufficient cash reserves, which puts business owners in a challenging situation.
We will take a look deeper into safely offering your customers payment terms and mitigating cash flow shortages. Our article will cover the basics of payments terms, the advantages of invoice factoring or invoice financing, and finding an invoice factoring company that will take the credit risk.
What are Payment Terms?
Payments terms are the contractual obligations between a supplier and customer that dictate when clients pay their invoice and other critical conditions or clauses. Many times it will be your much larger customer who dictates the credit terms, not you.
Payment terms range from 15 to 90 days or longer. In the COVID environment, commercial clients were known to extend these terms with their internal policies. Payment terms are essentially a delayed payment method or trade credit for the customer.
Invoices with payments terms have a standard format for their notice. The notice is the due date: “Due in Net X Days,” “Net X Days.” Commons terms across all industries include Net 15 Days, Net 30 Days, Net 45 Days, Net 60 Days, and even Net 90 Days. Some industries like automotive parts retailers have net 180(!) days as the norm.
You will also see these terms with an additional discount for the early payment feature. For example, terms of 2-10, Net 30, which means the customer gets a 2% discount if paid in ten days and no discount if paid within eleven to thirty days. But be careful, as large companies will take the 2% and still wait 45 days to pay you.
Payment Terms Downfalls
Offering your commercial clients terms is great for generating revenue but comes with cash flow timing issues. Small companies offering payment terms often have to purchase products to sell to their customer and wait two to three months for payment. During this period, your company still needs to operate, cover payroll, marketing campaigns, insurance, rent, and technology expenses. If your business does not have strong liquidity or cash reserves, your cash will inevitably run low or out.
Additionally, there are no guarantees that your customers will always pay on time or pay in full when offering payment terms. It is called bad debt when your clients do not pay their invoices but receive your product or service. Your customers may fall into tough times financially or refuse to pay due to many reasons or discrepancies. Bad debt hurts businesses because they write off the account receivable and never capture payment.
Qualifying Clients for Payment Terms
Offering payment terms to your clients is a selective process, and you should qualify your customers. Extending credit to unworthy customers can be costly to small businesses. Accordingly, running a credit report on your customer is an effective tool to determine creditworthiness.
It is essential to only offer credit terms to clients with a solid financial profile and capital to make timely payments. More importantly, qualifying clients does not guarantee your small business can offer these terms. Your company may need to temporarily cease operations due to cash shortages by extending payment terms.
If this is your company or small business, it may be time to consider financing your invoices and getting back to positive cash flow. Let’s look at this type of business financing.
Invoice Financing and Factoring Enable Payment Terms
For many startups, emerging, and growing companies, the risks of offering payment to their commercial clients are so significant your company might stop – temporarily at least. Small businesses with limited capital have difficulty delivering products and services with long payment periods as they must put their cash in upfront. This can cause new business deals or opportunities to be lost as entrepreneurs have little capital. Grow your sales with Accounts Receivable Factoring.
Invoice financing or factoring your accounts receivable (A/R) provides immediate cash flow and allows you to offer payment terms. Many small businesses and entrepreneurs will find invoice factoring is a more efficient and generally more accessible form of financing to obtain than traditional business loans or lines of credit.
Invoice factoring provides the majority of your A/R in the first payout, usually within days of submitting your invoices and documentation to the factoring firm. The first payout or installment can range from 70 to 90 percent of your A/R. The second payout is delivered once your customers pay their outstanding invoices in full. Before the second installment, the factoring company will deduct their fee, concluding the accounts receivable factoring transaction.
Reasons for Your Business to Invoice Factor or use A/R Finance
Invoice factoring provides many benefits to your business. The main contributions include:
- Provides immediate cash flow with high Cash Advance
- Small companies can offer extended payment terms
- Easier to obtain than traditional financing
- As your business grows so does the line of finance
- Invoice factoring services can be a long-term solution
- A/R Management and Collection Payment Services
- Non-Recourse Factors like Bankers Factoring take the Credit Risk
Who Qualifies for Invoice Factoring?
Many small businesses, startups, and entrepreneurs utilize invoice financing or accounts receivable factoring to solve their cash flow shortages – companies of any size can qualify for invoice factoring. General qualifications include:
- Strong internal processes for invoicing and documenting A/R
- Commercial clients with creditworthiness
- Ownership teams with business experience
- Businesses with sound fundamentals and a profitable future
How to Choose an Invoice Factoring Company?
Invoice factoring companies provide many benefits, but it is essential to find a strategic fit for your small business. When prospecting invoice factoring, companies ask the following questions to see if they meet your criteria:
- Do they offer both invoice factoring and invoice financing?
- Do they have experience in your industry?
- What is their specialty? Recourse or Non-Recourse Factoring?
- Does the company have a minimum or maximum for invoices dollar amount or volume?
- How do their current and past clients feel about their level of service?
- What are their factoring fees? Do you understand their factoring agreement?
- Will The Factoring Co take the Credit Risk?
- Do they have online reporting of unpaid invoices?
- What is the turnaround from account setup to working capital funding?
Should You Offer Selling Terms?
Small businesses looking to acquire or sustain commercial clients have challenges offering payment terms. The main challenge is the cash flow shortages due to the longer payment windows. Knowing your customers have good credit is not enough.
Business owners lacking large cash reserves turn to invoice factoring to pay their employees, suppliers, growth initiatives, and business partners to grow their business.
Invoice factoring can enable startups, small businesses, and entrepreneurs to achieve their goals by providing cash when they need it. Selling your invoices to a factoring company keeps businesses in operation and growth plans alive. Contact Bankers Factoring to see how factoring works and for the types of factoring that can safely grow your business. Learn how you can safely extend credit terms with non-recourse invoice factoring