In most companies, employees don’t get paid the same day they work. They work for a week and get paid in two weeks or get paid for last month’s work at the end of this month. The same concept can be scaled up to the business level. Businesses that rely on invoices, purchase orders, and contracts have to wait to see the money they’ve earned. Sometimes, that wait is up to 90 days. In the meantime, that company still has to pay for rent, utilities, payroll, supplies, and materials.
So how do B2B companies keep up with expenses while they wait to get paid themselves? One answer is invoice factoring, also referred to as accounts receivable factoring. When a business uses factoring, they can get what they’re owed right away providing ready cash for working capital expenses and fulfilling customer demand. Factoring helps companies avoid late fees, bad credit, tax problems, and damaged reputations. How? By accelerating cash flow, increasing deal close rates, and enabling them to offer extended repayment terms to their clients.
Let’s overview the types of industries that use factoring and why.
IT is a broad industry. It encompasses web developers, hardware manufacturers, telecom providers, app developers, consulting firms, and more. While some companies require complex machinery and equipment, the largest expense these companies face by far is labor. IT businesses employ highly compensated employees with specialized skills. Many of these professionals get paid weekly or bi-weekly. The services they render, however, aren’t compensated right away. After the IT company bills its clients, it’s typically a month or more before the business gets paid. To keep payroll flowing and retain top-level talent, IT companies can use factoring.
Most shipping and distribution companies are small but have to compete with a handful of much larger agencies. The larger agencies can afford to have a fleet of trucks on the road at any given time. They can afford to wait months to get paid because they have many shipments moving simultaneously. The smaller companies may have just a few trucks they can use at a time. They have to pay drivers, maintain their trucks, and get gas. One company might have to hold off on accepting new work because all of its trucks are in transit. These companies can use factoring to keep cash flow steady while they wait for customers to pay.
The security industry is another example of a labor-intensive business sector. As the political climate heats up and crime rates rise, there’s more demand for security personnel to protect individuals and property. The higher the demand, the more competition security companies face. Employees must be recruited and trained before they can enter the workforce and earn money for the company. That presents a significant investment by the company before they can see a return. Factoring helps cover these costs so they can get more personnel into the field faster while managing vehicle, training, and payroll expenses.
The apparel industry has been using invoice factoring for so long, the two are practically synonymous. That’s partially because their products can sit for months on a retail shelf, waiting to be sold. It represents a significant delay in compensation, up to 90 days out from delivery. If an apparel or textile business had to wait all that time, it wouldn’t be in business for long. It’s this state of affairs that gave birth to invoice factoring before any other industry. Apparel companies turned the accounts into assets by selling them for an advance on their payments. Factoring was such a good idea that it spread to other industries that also relied on their receivables.
Marketing is another service industry that relies on its labor. It’s also an industry that faces fluctuating expenses. While a term loan, hard money loan, or other commercial loans can help increase cash flow once, if the company needs more money, it must go through the entire process again. Factoring lets marketing companies keep cash flow steady, selling receivables as often as needed to keep up with changes in costs. It’s also great for startup marketing firms because they may not have been in business long enough to qualify for more traditional types of financing.
The healthcare industry faces a combination of the challenges faced by other industries. Healthcare professionals require specialized training and are often highly compensated. It’s an industry driven by labor that also requires expensive equipment, unique real estate, and extended business hours. All of these challenges raise overhead. But, healthcare companies also have to contend with insurance providers. Once they submit an invoice for services, it starts a slow process working its way through the insurance’s approval system. For one patient treatment, it can take 60 days for the healthcare company to get paid. Unlike some industries, however, many healthcare providers can’t put a pause on services while they wait. Factoring helps them keep the lights on and the doors open in the meantime.
Although invoice factoring started in the apparel industry, you can see that it benefits many others. Invoice factoring, despite the term, isn’t just for invoices. Any B2B business with purchase orders, invoices, and contracts can utilize factoring to better manage fluctuating revenue and expenses. If you’re reliant on accounts receivable, start a conversation about how your company can use extended payments and invoicing to benefit your business. Talk to a broker about factoring today.