How much cash are slow-paying customers really tying up?
The cash tied up in slow receivables is usually much larger than owners expect, and you can calculate it in two minutes. Start with days sales outstanding (DSO): your accounts receivable balance divided by your average daily sales. A company billing $200K a month (about $6,667 a day) with $500K in receivables has a DSO of 75 days.
Now compare that to where you’d like to be. If your customers paid in 30 days, you’d carry about $200K in receivables. The difference, roughly $300K, is cash your business has effectively lent to customers at zero interest. That’s the number to solve for. The cash gap calculator runs it with your figures.
| Actual DSO | Receivables carried | Cash trapped vs. a 30-day DSO |
|---|---|---|
| 30 days | $200K | $0 |
| 45 days | $300K | $100K |
| 60 days | $400K | $200K |
| 75 days | $500K | $300K |
| 90 days | $600K | $400K |
Why do government agencies and large companies pay so slowly?
Big, creditworthy payers are often the slowest, because they can be. Large corporations commonly set supplier terms at 60, 90 or even 120 days to manage their own working capital. Many route invoices through procurement portals where a missing PO number or mismatched line item sends the invoice to the back of the line.
Government is different but similar in effect. Federal agencies are generally required by the Prompt Payment Act to pay proper invoices within set timeframes, usually 30 days, or owe interest penalties, but invoices rejected for paperwork restart the clock. State and local agencies follow their own prompt payment rules, including Florida’s statutes for local governments and public construction. Prime contractors often pay subcontractors only after they’ve been paid. The upside: these payers almost always pay eventually, which is exactly what funders want. See how this works for government contractors.
What does waiting actually cost me?
Waiting has a cost even though it never shows up as an invoice. It shows up as discounts you can’t take, work you turn down, and expensive stopgaps you take on to make payroll. Put numbers on it before deciding factoring is too expensive.
- Lost supplier discounts. Skipping a 2% discount for paying in 10 days instead of 30 is equivalent to an annualized cost of roughly 37%.
- Turned-down work. If you pass on a $100K order with a 20% margin because you can’t fund it, that’s $20K of profit gone.
- Owner time. Hours spent chasing payments and juggling vendors are hours not spent selling or managing jobs.
- Stopgap financing. Credit cards, late fees and merchant cash advances usually cost far more than factoring.
- Vendor relationships. Paying suppliers late can push you onto cash-in-advance terms, which deepens the squeeze.
What does factoring cost on a 60- or 90-day invoice?
Factoring cost grows with time, so slow payers cost more to factor than fast ones. Fees commonly run about 1% to 5% of invoice value per 30 days, depending on volume, customer credit and term. Strong customers and higher volumes land toward the low end.
Here’s how that plays out on a $50K invoice at an illustrative rate of 1.5% per 30 days, charged in 10-day increments after the first 30 days. Compare the result to the cost of waiting and to your gross margin on the work. Many owners also build expected financing cost into their pricing for net-90 customers.
| Customer pays in | Approximate fee | Fee as % of invoice | Advance at 85% |
|---|---|---|---|
| 30 days | $750 | 1.5% | $42,500 |
| 45 days | $1,250 | 2.5% | $42,500 |
| 60 days | $1,500 | 3.0% | $42,500 |
| 75 days | $2,000 | 4.0% | $42,500 |
| 90 days | $2,250 | 4.5% | $42,500 |
Fee structures vary. Some funders charge a flat fee for the first 30 days, then smaller increments; others charge daily. Always convert proposals to total cost on your actual payment pattern with the factoring cost calculator.
Can I just ask customers to pay faster instead?
You should try, and you might win back a few days. Clean invoicing is the cheapest fix: correct PO numbers, the right remit-to address, proof of delivery attached, and invoices sent the day work is complete, not at month-end. Each of those can shave days off DSO.
Early payment discounts, such as 2% for paying in 10 days, sometimes work with mid-sized customers. Large corporations and government agencies rarely change their payment cycles for a single vendor, and some will take the discount and still pay late. When the customer won’t move, factoring changes when you get paid without asking them to change anything.
Are there special rules for factoring government invoices?
Yes. For federal contracts, assigning payment to a funder generally requires following the Assignment of Claims Act, which involves notice to and acknowledgment from the contracting officer and the paying office. Experienced funders handle the paperwork, but it adds time to the first funding, so start early.
State and local contracts vary by jurisdiction. Some allow assignment with simple notice; others have specific forms or restrictions. Construction work on public projects may involve retainage and pay application approvals that affect what can be advanced. A funder that regularly works with government contractors will know the process for your agency.
Step by step
- Calculate your DSODivide your current receivables by average daily sales to see how long customers really take to pay.
- Measure the trapped cashMultiply the gap between your DSO and a 30-day target by your daily sales.
- Price the cost of waitingAdd up lost supplier discounts, turned-down work and stopgap financing costs.
- Model factoring on real payment patternsRun your customers’ actual days to pay through a cost calculator, not the stated terms.
- Clean up invoicingSend accurate invoices with POs and proof of delivery on the day work is done to speed both payment and funding.
Illustrative scenario
Environmental services firm waiting on a prime contractor and a state agency
An environmental remediation company billing about $350K a month split its work between a large engineering prime contractor paying in 75 to 85 days and a state agency paying in about 60. With DSO near 75 days, it carried roughly $875K in receivables and kept stretching vendors and its equipment rental company.
- A $900K factoring facility advancing 85% on approved invoices from both payers.
- Concentration limits of 50% for the prime contractor and 50% for the state agency given their payment records.
- Fees structured as an initial 30-day rate plus 10-day increments, so faster state payments cost less.
- Invoice package standardized with signed field tickets attached to cut rejections.
Outcome: The company received about $297K in advances on its first batch of invoices within two days of verification, caught up on its equipment rental account, and started taking 2% early-pay discounts from two material suppliers, offsetting part of its factoring cost.
A composite example for illustration, not a specific client, offer or promise of terms.
Questions people ask
Is factoring worth it if my customers always pay, just slowly?
Slow but reliable payers are the ideal fit for factoring. The funder’s main risk is time, not collection, so pricing is usually better than for risky customers. The question is whether the cost is lower than what waiting costs you in lost discounts, turned-down work and stress.
How do I calculate DSO?
Divide your accounts receivable balance by your average daily sales. For example, $500K in receivables and $200K in monthly sales (about $6,667 a day) gives a DSO of about 75 days. Tracking it monthly shows whether collections are getting better or worse.
Can I factor invoices from the federal government?
Yes, but federal receivables generally require an assignment under the Assignment of Claims Act, with notice to the contracting officer and paying office. Funders experienced with government contractors handle the paperwork. The first funding may take a bit longer while the assignment is acknowledged.
Does factoring cost more when customers pay late?
Yes. Most factoring fees accrue over time, so an invoice paid in 90 days costs more than one paid in 30. Ask funders how fees are charged after the first period, whether in daily, 10-day or 15-day increments, and whether there’s a cap.
What happens if a customer pays even later than expected?
Fees keep accruing until payment arrives, up to any cap in your agreement. In a recourse facility, if an invoice passes a set age, often 90 days, you may have to buy it back or replace it with a newer invoice. Non-recourse facilities shift credit risk for customer insolvency, usually at a higher price.
Will factoring damage my relationship with large customers?
Rarely. Large corporations and government agencies receive notices of assignment routinely and just update the remit-to address. Many of their other suppliers factor too, often for exactly the same reason: long payment terms.