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What could possibly be bad about account receivables? Well, wait for it to be paid by customers. While you wait, your creditors are drumming their fingers on the table and get grumpy about paying them.
This scenario is faced sooner or later by almost every company. The subject is known as cash flow. Businesses can be very busy, but also very cash poor. This may seem strange, but consider the following.
Suppose you do business in an industry where custom and standard is to pay invoices net 60. This means customers have 60 days to pay you from the invoice date. Most people will take the full 60 days, of course. Now imagine that the vendors you use expect payment in net 30. This means you have 30 days to make the payment from the date of the invoice. Sooner or later, the 30-day difference is going to reach.
This may seem like an unrealistic scenario, but it actually happens every day. It usually plays out when my company [it were] allows the business to a larger one. Larger companies have the leverage to demand 60 or even 90-day grace period. It’s take it or leave it situation and most small businesses can not afford to let a large bill pass.
So, what can you do about the funding shortfall? How do you go about solving the time between when you get money when you need to pay the bills? This is a singular cash flow problem millions of businesses face, so do not feel like you’re alone.
Many companies make ends meet by selling their invoices to a factoring company. In short, the process is somewhat like a cash advance. The factoring company evaluates accounts you have and the company responsible for paying them. It will then give you a discounted rate of account today in exchange for a fee and collection of the account when it comes due. Example explains factors.
I do with “Big Bad Company”. They owe me $ 30,000, but will not pay the bill in 60 days. I owe $ 15,000 to credit my required to pay in 30 days. A factoring company takes a look at the invoice and recognizes Big Bad Company is a good bet to pay. The factoring company then offers to give me a 92 percent discount on the invoice. This means that the factoring company will give me $ 27,600 today. When Big Bad Company pays the bill for 90 days, factoring company gets the full $ 30,000.
The benefit of selling account your requirements is you resolve any cash flow problems. The downside is eating into your profits a bit. In some cases, it is clearly a small price to pay. In the second, lost profits is a high price to suffer. This is why Factoring is a financial decision that needs to be business owners in each case. When it works, it can be a huge help to companies.
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