Many aviation parts suppliers run into cash flow problems because of how accounts payable and accounts receivable are managed. Generally, suppliers demand quick payments, which means that accounts payable turns fairly quickly. On the other hand, most aviation customers pay their invoices on net 30 to net 60 day terms. This means that accounts receivable turns fairly slowly. Basically, suppliers are asking for quick payments whereas customers are paying their invoices slowly. And unless the aviation parts supplier has the  financial resources to handle this, they will end up having working capital problems.

One way to address this problem is to try and reduce the time that it takes to get invoices paid. It’s common to offer customers a 2% discount if they pay an invoice in 10 days or less. While this is a good strategy, it also has an inherent risk. It leaves your customers in control of your cash flow, and they could slow down their payments at any time. For many aviation part suppliers, a better strategy is to use invoice factoring.

Invoice factoring solves this problem by accelerating the revenues that are tied in slow paying receivables. This provides your company with the working capital it needs and minimizes the problems caused by slow paying customers. Factoring transactions are structured by using a factoring company that acts as a financial intermediary. The factoring company advances funds for your invoices and then holds your receivables as collateral. This effectively accelerates a substantial portion of your revenues and provides the necessary working capital to operate the business, pay suppliers, and pursue growth opportunities.

The most important requirement to qualify for factoring is to have credit worthy customers. This is because their credit worthiness and their ability to pay invoices on time acts as collateral for the transaction. Additionally, your company should also:

• Invoice for delivered and accepted products
• Have its accounts receivable unencumbered by liens
• Be free of legal and tax problems
• Have an experienced management team

One of the most important advantages of factoring is its flexibility. Factoring companies can design lines that grow with your sales, provided that your customers and your company meets the factoring criteria. Because of this, factoring can work very well for growing aviation parts suppliers that are experiencing working capital problems due to slow paying customers.

Small and mid-sized aviation parts brokerages face a common challenge. They usually have to buy parts  from suppliers and pay for them quickly – either COD or net 10 days. However, when they sell a part to an aviation company they need to wait between 30 and 60 days to get paid. This can create an obvious cash flow problem because there can be a substantial gap between when expenses are paid and revenues received. If the company has a cash reserve, this gap will usually not present a problem. But if the company is growing – or has minimal reserves – this gap can create a serious problem. One way to solve this problem is to use business financing to cover expenses while waiting to get paid.

There is a specific business financing solution that is designed to solve this cash flow problem. It’s accelerates the revenues that are due to your aviation parts company form customers, providing the liquidity you need to meet your operational expenses and grow. This solution is called factoring.

Although factoring accelerates your company’s cash flow, it does not require that your customers pay any sooner. The transaction is structured through a financial intermediary – a factoring company – that advances funds using your unpaid invoices as collateral. The transaction closes once your customer pays for the invoice in full. Most companies will regularly use a factoring facility to finance part of their accounts receivable to ensure they have sufficient funds to cover operational expenses.

One advantage of invoice factoring is that it’s easier to obtain than conventional financing. The most important requirement is that your aviation customers needs to have good commercial credit and have a track record of paying invoices on time. Aside from that, invoices need to be free of any tax or legal encumbrances. Most invoice factoring facilities can be setup in about a week or two.

A major benefit of factoring is that it can grow as it finances your aviation parts company. The financing line is directly tied to your company’s sales and can easily grow – provided your sales are to solid customers. This makes invoice factoring an ideal solution for small and growing aviation parts brokers.