Your Customers Pay in 60 Days. Your Bills Don't Wait.
By Heath Thomas
A company can be growing, winning new customers and sending out invoices every week, yet still find itself short of cash. The problem is often timing. Revenue may be earned today while the customer is not required to pay for another 30, 60 or 90 days. Meanwhile, employees, suppliers, rent and taxes still need attention.
This is the working-capital gap: money committed to operating the business before cash from sales arrives.
A simple example
Imagine a commercial supplier delivers $100,000 of goods to a creditworthy business customer on net-60 terms. The supplier has completed the sale, but may not collect the invoice for roughly two months. During that period, it must still purchase inventory, meet payroll and finance the next order.
The company could be profitable on paper and still face pressure on its bank balance. The larger the sales pipeline, the more cash may be tied up in outstanding invoices.
What is invoice factoring?
Factoring is an arrangement in which a business sells eligible accounts receivable to a factoring company, generally receiving an initial cash advance and a later balance after the customer pays, less agreed fees and adjustments.
Factoring is different from a conventional loan, although its economics and contractual obligations can still be substantial. Eligibility and pricing depend on factors including the customer, invoice quality, industry, contract terms and collection risk.
What should a business evaluate?
Before entering a factoring arrangement, management should examine:
- Total cost: discount fees, administrative charges, minimums and the effect of how long invoices remain unpaid.
- Recourse: whether the business must repurchase invoices if customers do not pay, and under what circumstances.
- Customer communication: whether customers will receive assignment notices or pay the factor directly.
- Contract flexibility: minimum volume commitments, termination provisions, reserves and any security interests.
- Alternatives: an operating line of credit, negotiated supplier terms, faster invoicing, early-payment incentives or improved collections.
A lower headline fee is not necessarily the lowest overall cost. The right comparison is the total cash received, timing, contractual risk and impact on customer relationships.
Growth needs liquidity, not just revenue
A growing order book can be encouraging. But every additional order can also demand more cash before the related invoice is collected. Financial planning should therefore connect the sales forecast with a rolling cash-flow forecast, customer payment behaviour and available funding capacity.
Factoring may be useful for some companies with eligible business-to-business receivables. It is not appropriate for every business or invoice, and it cannot fix an underlying lack of profitability on its own.
The practical question is not simply, “How much are we selling?” It is, “When will those sales turn into usable cash, and what will it cost to bridge the gap?”
This article is general educational information, not financial, legal or tax advice or an offer of financing. Products, availability and terms vary by provider and jurisdiction.
For commercial financing inquiries, explore business financing. Working Capital Brief has a commercial affiliation with Oceanwide Capital Inc. Read disclosures.