What could possibly be bad about account receivables? Well, waiting for them to be paid by your clients. While you wait, your own creditors are drumming their fingers on the table and getting grumpy about you paying them.

This scenario is faced sooner or later by nearly every business. The subject is better known as cash flow. A company can be very busy, but also very cash poor. This may seem very strange, but consider the following.

Assume you do business in an industry where the custom and standard is to pay invoices net 60. This means your clients have 60 days to pay you from the date of the invoice. Most will take the full 60 days, of course. Now imagine that the vendors you use expect payment in net 30. This means you have 30 days to make payment from the issuing of the invoice. Sooner or later that 30 day difference is going to catch up to you.

This may seem like an unrealistic scenario, but it actually happens every day. It usually plays out when a smaller business [that would be you] does business with a larger one. The larger company has the leverage to demand 60 or even 90 day payment periods. It is a take it or leave it situation and most small businesses cannot afford to let the big account pass by.

So, what can you do about the financing shortfall? How do you go about solving the time delay between when you get money and when you have to pay bills? This is a singular cash flow problem millions of businesses face, so don’t feel like you are alone.

Many businesses make ends meet by selling their invoices to a factoring company. In short, the process is somewhat like a cash advance. The factoring company evaluates the invoices you have and the business responsible for paying them. It will then give you a discounted percentage of the invoice today in exchange for a fee and the collection of the full invoice when it comes due. An example helps explain factoring.

I do business with “Big Bad Company”. They owe me $30,000, but will not pay the invoice for 60 days. I owe $15,000 to my credits that has to be paid in 30 days. A factoring company takes a look at the invoice and recognizes Big Bad Company is a good bet to pay. The factoring company then offers to give me a 92 percent discount on the invoice. This means the factoring company will give me $27,600 today. When Big Bad Company pays the invoice in 90 days, the factoring company receives the full $30,000.

The benefit of selling your account receivables is you solve all your cash flow problems. The downside is you eat into your profits a bit. In some situations, it clearly is a small price to pay. In others, the lost profit is to high a price to suffer. This is why factoring is a financial decision that has to be made by business owners on a case by case basis. When it works, it can be a huge help to a business.

Richard A. Chapo writes factoring articles for FactoringCompanyInformation.com.