Industrial and commercial customers of machine shops usually pay on net terms due in 30 to 70 days. This extended time between the work being done and the cash coming in can put many profitable machine shops into cash flow danger. If your machine shop is having cash flow problems, you need to get ahead of the situation before it becomes a major problem.
Three Ways Accounts Receivable Factoring Can Help
If your shop has a substantial amount of accounts receivable outstanding, factoring them may be the solution to your cash flow problems. Here are three ways factoring can help your shop stay afloat.
- Factoring can free up cash when you need it most.
- Factoring can improve cash flow without taking on additional debt.
- Factoring allows your shop to extend payment terms with confidence.
Getting the Cash You Need
Do you have a payroll due in a few days, that you might not be able to meet? Are the lights about to be turned off? Is there an order you can't take because you don't have the money for raw materials? These situations are not that uncommon for many machine shops. They have a ton of money invested in inventory and employee salaries. And that money is tied up until their customers pay open invoices.
With accounts receivable factoring, that money no longer needs to be tied up. Within a couple of days, the factoring company can deposit up to 90 percent of the amount of your open invoices into your back account. This will allow you to pay your bills or to get the materials you need for that big order.
Improving Cash Flow without More Debt
Getting a bank loan is a tried and true method of getting more working capital. However, your shop needs excellent credit and a solid customer base to get a bank interested in extending a business loan. Plus, taking on a business loan puts more debt on your books. While some debt is inevitable for most businesses, too much debt works against the shop in the long run.
Accounts receivable factoring will give you the capital you need without taking on more debt. If your shop has less than ideal credit, or you are just getting your shop up and running, getting a bank loan is questionable anyway. With factoring, all you need are invoices less than 90 days old and a factoring company that will work for you.
Extend Payment Terms with Confidence
Have you ever been hesitant to take on a new customer? Extending payment terms is a bit of a gamble, especially with new clients. You don't know whether or not that company will pay its bills on time or not. Your livelihood depends on it.
With A/R factoring, that is no longer a problem. You can ask the factoring company to check the credit of your new customers before extending payment terms. This does two things. It tells you if the customer is a good credit risk. It also assures you that the factoring company will be willing to accept an invoice from that customer in the future.
Your machine shop looks nothing like one that was open 100 or 200 years ago. Why should your cash flows work the same? There is no need to keep all your cash tied up in your accounts receivable waiting for payments to arrive. You can use accounts receivable factoring to get that critical cash to make payroll, buy supplies, and expand your business.