This leaves many owners losing sleep and making extra trips to the mailbox in hopes of finding the payment that will turn things around.

Unfortunately, when dealing with a slow or late payer there are not a lot of good options for the small business owner.

Banks are not likely to lend you money unless you have significant assets to back it up. Even when they reluctantly grant approval, as if adding insult to injury, banks may charge substantial fees and interest for the short-term loan. Plus, the debt will show as a liability on your books.

In need of improved cash flow, many business owners look to factoring account receivables as an alternative to bank business loans.

When considering factoring it is important to remember you do not need to factor ALL accounts receivable. You get to pick and choose which ones to factor and which will continue to pay you directly.

So, when should you NOT factor your invoices?

1. Your customer typically pays within 10-14 business days.

Although you could factor a quick payer (and the Funder would love you to), you may be better off just budgeting for that time frame. However, a Factor will often give you a really good discount rate for such strong payers. Decide if the factor’s fee is worth having the money to work with sooner. If not, just wait it out and pass on sending these invoices to the Factor.

2. You don’t need the money.

Ok, this one sounds obvious, but you would be surprised. Some companies get into the factoring routine, but then don’t get back out. It is easy to become used to the create an invoice and get paid within 24 hours routine. But if your business is not crunched for cash, or you do not have a better use for the money immediately (such as the ability to realize discounts on your own goods or services) then you may just pass on factoring altogether or at least scale back on the number of invoices you factor.   You can always bump the number back up if you need to in the future.

3. You have a line of credit with a grace period.

If you have a line of credit, or even a credit card, that allows a 30-day grace period it might be better to tap into these funds on a short-term basis. A “grace period” will allow use of funds at no cost. The down side is you better be certain in your ability to pay off that balance at the 30-day mark. If you cannot pay off the debt it is likely the charges on the line of credit or credit card will outweigh the cost of factoring.

Factoring is not for everybody, but almost every small business has situations where factoring, even in the short term, can offer the perfect solution. Although some businesses use factoring permanently, most utilize factoring services for approximately 18-24 months.

Knowing when to factor and when not to factor invoices can keep your business financially fit for years to come.