On paper, running a business seems simple. Businesses sell a product or service, issue invoices, and then the customer makes a payment to settle the balance owed. Outside of businesses with a point of sale system, things get more complicated. Staggered payment schedules can cause delays in customer payments, place a strain on cash flow, lead to collections, force businesses to take on debt, and more. Fortunately, businesses can eliminate all of those drawbacks by factoring their unpaid invoices.
The Waiting Game Starts with Staggered Payment Schedules
Staggered payment schedules are a standard part of most business transactions. After a customer makes a purchase, an invoice is issued with a staggered payment schedule of 30, 60, or 90 days. The logic behind staggered payment schedules is that they allow customers time to make sure there is nothing wrong with their orders before settling their accounts. For businesses, staggered payment schedules are supposed to ensure there is a constant stream of revenue. In reality, staggered payment schedules force businesses to experience unnecessary waiting times before they receive payments. Sales can be booming, but if businesses are waiting a month or longer for payments from their customers, cash flow can become inverted, with more money leaving the business to cover expenses compared to the amount of revenue coming in from customer payments.
Gaps in Revenue Usually Lead to Debt
When businesses are forced to wait on revenue due to staggered payment schedules, cash flow becomes strained. Businesses need to cover overhead, make payroll, maintain marketing, and more. If payments are staggered but 30 days or longer, expenses quickly overshadow revenue. As a quick fix, many businesses turn to short-term loans. However, short-term loans can be a slippery slope. Loans of any type place debt on the balance sheet and impact credit ratings. While the one-time injection of capital can tide over gaps in cash flow while businesses wait for payments from customers, any revenue must be split between maintain the business and repaying the balance owed to the lender. If cash flow issues are recurring, businesses can take out consecutive short-term loans, each at lower amounts, while they tank their credit ratings. Short-term loans can prevent businesses from making any headway and often lead to insurmountable debt and bankruptcy.
We have already established that staggered payment schedules provide customers with a period of 30 days or longer in which to pay for their purchases. While this is a generous amount of time, not all customers pay within that window. If customers do not pay their invoices on time, businesses have to devote time and resources to performing collections. Collections can take up to 45 days before businesses recoup the money they are owed. Including the initial payment schedule, a business could be waiting anywhere from two months to over 120 days if an invoice goes to collections. If more than one customer exceeds the payment schedule and multiple invoices are moved to collections, then that business is not receiving revenue, and may be forced to take out loans like in the above section of this article.
The fastest and most efficient way to avoid all of the drawbacks associated with staggered payment schedules is to factor unpaid invoices. Invoice factoring converts unpaid receivables into cash quickly to maximize cash flow. Invoice factoring is not a loan. Instead, it is a simple sale of an asset, in this case, an invoice. The process does not place debt on the balance sheet and allows businesses to preserve their credit ratings. Because of the fast turnaround time, invoice factoring eliminates staggered payment schedules and businesses do not have to worry about receivables aging out to collections. The accelerated cash flow allows businesses to build up capital to not only cover regular expenses, but to also make plans for growth. Any business that issues invoices with payment schedules of 30 days or more can qualify for invoice factoring.
Stop the Waiting Game Today
Single Point Capital is a national leader in invoice factoring services. We will convert your unpaid receivables into cash within a single day, and give you tools to track your payments, perform credit checks on your customers, and more. To get started, contact the team at Single Point Capital today.