Accounts receivable are ballooning – factor invoices or tighten terms?

When customers pay 60 days instead of 15, your cash flow suffers. Tightening terms—requiring deposits, progress payments and enforcing late fees—should be your first move. If that isn’t enough, invoice factoring can convert receivables into cash. With factoring, you sell accounts receivable to a third-party at a discount and receive an advance of 70%–90%.

The factor collects from your customer and remits the remainder, minus a fee of 1%–5%. Factoring provides immediate cash and removes collection headaches, but the fees eat into margins. Frequent factoring may also signal to lenders that you have a cash-flow problem.

Use it sparingly, continue to pressure customers for prompt payment and review your credit policy. Sometimes the cheapest financing is firing chronic late payers.