Any small business owner knows how cash is king. What many donít know is they can grow their business faster by factoring their accounts receivables and thus unlocking significant amounts of operating cash.

If you run your own business, you offer specific payment terms to customers who have bought your goods or services. Typical terms are between thirty and ninety days, with penalties built in for delinquent payments. This money that you are waiting for (accounts receivable) comes primarily from your working capital, and increases your costs of doing business.

Every business owner needs to react quickly to unexpected situations affecting the business. In case you need money quickly, either to meet payroll, or pay off creditors, or even remain solvent, chances are your first thought is to approach a bank or other financial institution for a loan. This is not only expensive (high interest rates), but banks may not be willing to make loans to smaller, fast-growing businesses who donít have the required credit history, but need the money the most. Also, the resulting debt makes the balance sheet bloated and reduces the owner's built-up equity.

Most small businesses operate on a tight budget without dedicated staff to focus on customer accounts receivable recovery. Chances are, the typical small business owner will spend a significant amount of his or her time chasing down customers to make sure their money is received in a timely manner. You could be spending this time much more productively by focusing on marketing and selling your products, developing new services or new markets and growing your business. Accounts receivables factoring is a convenient way for you to obtain cash immediately, typically within two or three days of making the sale, instead of waiting for thirty, sixty or ninety days for the customer to make the payment. This cash can be reinvested in the business to fund the top-line growth that you want to achieve.

You, the small business owner, reach an agreement with an accounts receivable factoring company (factor) who will give you a cash advance against your invoices. Typically the factoring company will advance you between eighty and ninety percent of the invoice amount, with the rest being held back for fees and as a buffer to compensate for delinquent customers. The factoring company then collects the money when the customer pays the invoice. In case the customer pays quickly, say within 30 days, the factoring company may even rebate some of the money they held back to you. Typically the cost for factoring your accounts receivables depends on three things: the length of time the invoices are outstanding, the volume of transactions you are factoring and the creditworthiness of your customers.

To minimize the cost of factoring your accounts receivables, here are some suggestions. First, try to factor those accounts receivables where you are reasonably sure that the customer will pay quickly. Second, factor larger dollar amounts and larger invoices, to reduce the factoring fees. Long-term relationships that result in factoring large cumulative amounts over time can also reduce the factoring expenses. Third, factor invoices from those accounts which have a good credit rating and a history of regular payments. If your customers have marginal or poor credit ratings, the factoring company will likely increase their fees to cover the added risk.

Accounts receivable factoring can be a very smart way of freeing up cash and financing the growth of your business. At the same time it allows you to focus on what you truly enjoy, selling products and keeping your business humming.