If you are having trouble paying regular expenses, stabilizing profits or putting money away, think about potential culprits. You may very well conclude that the only plausible answer is how long it takes some of your customers to pay you in full. Accounts receivable factoring was created for cash flow problems that stem from elongated business cycles. After determining that this is the right business funding program for you, the next logical step is to look into what you have to know in order to be approved. Much like a traditional small business loan, access to accounts receivable factoring is largely dependent on a series of metrics.
You see, suffering from an elongated business cycle doesn’t necessarily mean you are automatically a good fit for accounts receivable factoring. To be sure, you must look into specifics, in regards to your own cash flow as well as the benefits you would likely receive upon approval.
1. Average payment length
Let’s say you offer 30-day payment terms to your customers. How long does it take each of them to pay you in full? You know that some customers pay late, but you must know exactly how long it takes for their average payment to come in. Once you have these numbers, figure out how long it takes the average customer (or most customers) to pay in full. You might find that a decent amount of customers usually pay in 30 days but sometimes take as long as 60 days.
2. How long it takes for delinquency to decrease profit
Many small businesses pursue accounts receivable factoring primarily to stop profits from shrinking. When a customer takes longer than the allotted time frame to pay, the profits from that sale decrease. This makes it very difficult to save money, which is essential for business growth. If you are interested in accounts receivable factoring, you need to know exactly when you start to lose profits on an invoice. If you offer 30-day payment terms, for example, your profit on an invoice might begin to decrease after 45 days.
Some customers might take so long to pay that you lose the invoice’s entire profit due to the effect it has on your cash flow or ability to pay monthly expenses. In this case, it would probably help to calculate how long it would take for an invoice’s profit to completely disappear.
3. How long until a payment becomes more difficult to collect
A reputable business lender will not just purchase any outstanding invoice. Before agreeing on a purchase, the business lender or “factor” will make sure there is no reason to believe the customer will not pay at all. If there is a decent chance the customer will not pay or will take an excessively long time to pay, the factor may decide not to purchase the invoice. The factor might even refuse to purchase an invoice from a returning customer if that customer is usually difficult to collect from. So, to get an idea of the likelihood of one such invoice being purchased, figure out when an invoice from that customer becomes difficult to collect. You might determine that a customer who is supposed to pay in 30 days becomes difficult to collect from after 40 days.
4. Point in which the factor keeps the second payment
Every business lender is different when it comes to fees and payments to the borrower. When the factor purchases an invoice for a discount price, the borrower is paid right away. That part is nearly universal. But then there’s a second payment you may have heard about it. Once the factor collects the payment from the customer, the borrower gets a percentage of the remainder from the first payment. This second payment, however, is only distributed if the factor is able to collect from the customer within a certain time frame. That time frame depends on the factor. So, before agreeing to work with a factor, find out how long it would take them to collect from a customer for them to keep the second payment instead of giving it to you.
5. How much would accounts receivable factoring increase profits?
Every borrower has a goal, whether it’s increasing profits, staying current on bills, or stabilizing revenue. Business lenders tend to favor applicants who have data to support their goal and know exactly what achieving this goal will do for them. Accounts receivable factoring is designed to shorten your business cycle, which can improve numerous elements of your business. So, if your business cycle were to go from 60 days to 3 days, how much would profits increase? How much quicker would you be able to meet your business’s financial obligations? Your chances of approval will increase significantly if you can tell your business lender everything you could do with 57 more days to use the revenue from an invoice.
This isn’t the only option for elongated business cycles
If your calculations lead you to believe business lenders will see no value in purchasing your unpaid receivables, don’t panic. Companies like United Capital Source will likely be able to distribute a different business funding program to bridge the gap between your accounts receivables and accounts payable. Many UCS clients use working capital loans or business lines of credit to make payroll or cover business expenses before compensation comes in. As long as you muster up the courage to seek help from a reputable business lender, your cash flow problems are not a lost cause.