Most commercial customers demand net 30 to net 60 day payment terms for their purchases. It’s a basic rule of business – if you want to make commercial sales you need to offer credit terms. But this is a very delicate challenge. If your credit policies are lenient, you will improve sales but hurt profitability (because of non payments). On the other hand, if your credit policies are too strict, you will lose sales. In an ideal world, you want to offer credit to customers that deserve it and deny credit to those that don’t.

There is one additional worry for companies that plan to offer net 30 payment terms – that is – can they actually afford to do it? Not every company has the wherewithal to wait 30 days for payments. There are suppliers, rent and employees that need to be paid – often sooner than 30 days. And they need to be paid on time or you risk losing key suppliers or personnel. One way to address this problem is to use a business financing tool known as invoice factoring.

When used correctly, invoice factoring can help you minimize both the credit risk and cash flow problems of offering net 30 terms. Factoring works by using a financial intermediary, called a factoring company, that acts as a credit manager and invoice financier. The factoring company helps you determine the commercial credit worthiness of your customers so that you can decide who to offer terms to. Also, they can advance funds against your net 30 invoices to credit worthy customers. This provides the liquidity you need to help cover your operation expenses.

One advantage of factoring over other business financing solutions is that it’s easier to obtain. To qualify for the funding advance, your company must invoice credit worthy customers. Aside from that, your invoices need to be free for legal or tax encumbrances. This makes factoring a perfect financing and credit solution for small growing companies that have a potential roster of good customers.