Working Capital Financing – Innovative Way of Reducing Days Sales Outstanding
Days Sales Outstanding (DSO) refers to the average number of days that a company takes to collect payment on an invoice after a sale. Why is this number important to small and mid-sized businesses?
Because a low DSO number means that it takes a company fewer days to collect its accounts receivable, while a high DSO number shows that a company is selling its product or services to customers on credit – essentially a free loan – and taking longer to collect money.
On average, it takes companies over 60 days to get paid for these goods and services. This means that their working capital is tied up in outstanding invoices for months when they may really need the funds now, whether it will be to add new resources, get a discount on raw materials or take advantage of growth opportunities that arise.
Through an innovative loans from Innovative Finance solution, small and mid-sized firms can quickly access the funds they need and significantly reduce their DSO at the same time – without taking on additional debt.
This working capital finance solution is a type of invoice financing. Using an online auction marketplace, small and mid-sized companies can post their commercial accounts receivable and sell to the highest bidder.
The seller sets all the terms, the minimum advance amount they want, maximum discount fee they are willing to pay and the length of the auction. Registered and approved, accredited institutional investors from around the world have access to these auctions 24/7 and can bid in real-time on the invoices that meet their investment criteria.
A seller can choose an auction length between 3 and 10 days. In some cases, small and mid-sized companies can access much-needed working capital in as little as 24 hours, if they set a “Buyout Price”. Similar to eBay’s “Buy It Now”, if selected by a Buyer, the auction would close immediately, regardless of the auction length.
Once the auction closes, the advance amount minus a small transaction fee is electronically deposited to the seller the next day. This means businesses can expedite improvements and take advantage of growth opportunities when and how they choose.
For small and mid-sized businesses, one of the largest assets is its accounts receivable. Typically about 60% of potential funds is tied up in outstanding invoices. When the average DSO is 60+ days, that is a long time to wait for finances that a business can use for sustainable long-term growth.
In today’s economy where unemployment is up and bank lending is down, small to mid-sized business owners are seeing this average grow even more as their debtors request extensions on payment. Tapping into outstanding accounts receivable for much-needed funds by using this efficient online working capital finance solution means they can use their outstanding invoices to significantly reduce their DSO.
In this online receivables marketplace, the seller chooses how many and which invoices to sell depending on what his financial need is at the time. With each invoice that is listed in auction and sold, his average DSO drastically decreases. Growth potential for a small and mid-sized business relies on ingenuity, but very little can be accomplished without quick access to funds.