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How to reduce the risk of non-payment in deferred settlements: factoring for business





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According to statistics , up to 82% of small companies close due to cash gaps. Often they arise due to the fact that customers require deferred payment, and then delay payment of the invoice. This can lead to a shortage of money to finance activities. Not every company manages to survive to pay for the work performed. Today we’ll talk about a financial instrument that can solve this problem.



Problem: Cash Gap



Fundbox estimates that in the United States alone, counterparties owed accounts of approximately $ 825 billion to contractors. This is about 5% of America’s GDP. According to experts, in this country, each company in the small business category owes an average of $ 84,000.



Deferred payment may be required by customers from a wide range of areas. Moreover, the obvious decision to sell prepaid services can not always be implemented. For example, if competitors give deferrals of payment, then this may force the business to go the same way for fear of losing customers. As a result, there are risks of delinquencies, non-payments and cash gaps.



For example, according to the same Fundbox service, the average payment delay for companies providing field services (repair, installation, cleaning) can reach up to 25 days. At the same time, payments on the accounts of companies of this category were overdue, on average, by 9 days.



So how can businesses prevent working capital problems in this situation?



Solution: factoring



Companies that operate in conditions of deferred payments from customers can use the factoring service. It works like this: the company sells the goods to the buyer or provides services to the customer and does not require immediate payment from him. At the same time, the business receives money right away, a financial institution (bank, broker or factoring company) pays for the buyer. And then the customer owes this company, and not the one who shipped the goods to him or rendered the service.



The bottom line is that a financial company providing a factoring service pays for the manufacturer’s work at a small discount, and receives the entire debt from the customer. As a result, a business for a small percentage gets the opportunity to receive money immediately, its counterparty receives a deferred payment (usually up to 180 days), and the financial company takes the risk and earns.



A company that provides factoring services is called a factor. The seller of goods and services acts as a creditor, and their buyer or customer is a debtor. There are two types of factoring - with recourse and without recourse.



What does this give to business?



In practice, a factoring company can immediately pay up to 90% of the total debt of the buyer to the seller. When the debt is paid off, the lender will receive another 10% minus the commission factor.



In fact, this is a short-term loan to business, which allows it to solve a number of problems:





The factoring service is available to ITI Capital corporate clients. Under the factoring agreement, you immediately receive money and do not waste time waiting and can more actively develop your business.



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