Factoring Receivables Strengthens Business Cash Flow
Few things are as important for your growing business as a healthy and strong cash flow. Without it, your small business will flounder if it ever gets off the ground at all. Invoice factoring companies can help improve a business’s cash flow by keeping money coming into your business even when client payments stall. But before we get into the ways in which invoice factoring can help your company’s cash flow, let’s review what cash flow is and why it is so important to your small business.
Breaking Down the Nuances of Cash Flow
Cash flow, in its simplest terms, is the money coming in and going out of your business. Money can come into your business in a number of ways but mostly through sales or more specifically collection of payment from sales. Sales are good but without actual payment, a sale is just a promise to pay the value of the invoice under its net payment terms. Sales are not, however, payment itself. Many new and even established businesses overlook this significant distinction. That is, businesses focus a lot more time, energy and resources into generating sales than they do collecting on those sales. This results in a cashflow gap that can make it hard for small businesses to do essential things like pay employees on time, order more product or keep the lights on. Factoring for small business can help alleviate these challenges.
Payment Gaps Harm Cash Flow, But Invoice Factoring Can Help
Sometimes, the gap between the time when a sale is made and the time when payment is remitted can be considerable. A 30-day payment period is standard in most industries but can be longer in telecom, government contracting, construction and manufacturing sectors. Even a standard 30-day payment window can slow down business growth if your business is going through an expansion phase.
New Businesses Need Robust Cash Flow Even More
Startup or early stage businesses need cash flow too yet these businesses can struggle to obtain sufficient capital. This is because startups might have a lot of expenses and may struggle to get the prospects and sales they need to sustain their business let alone grow it. Early phase businesses will also have a harder time qualifying for traditional financing such as bank loans.
Without cash payment or money in hand, a business can not sustain its own operations. If a business runs out of money to keep itself operational despite having “sales” on the books, the business will eventually close its doors without some type of external cash infusion.
Invoice Factoring vs. Bank Loans
Businesses will sometimes obtain a bank loan in order to keep itself operational. Though this can be a good choice for some businesses, it can be problematic for others. This is because business loans need to be paid back (with interest), take time to qualify for and may put an undue burden on the borrower. If the root of the business’s cash flow problems does not get resolved, the loan will only be a temporary fix. The underlying problem of insufficient cash flow will present itself again.
Invoice factoring can be a better option for businesses suffering poor cash flow for several reasons, including:
- Factoring accounts receivables is not a loan or new money that needs to be paid back. Rather it is more like collecting an advance on money that is already owned to you.
- Invoice factoring can occur on a monthly basis rather than a once a year. With regular cash infusions coming from your invoices, you can manage your cash flow each month so there are no shortages for your business.
- Lastly, factoring receivables can help manage your business’s overall accounts receivable / account payable process. By collecting payment in a manner of days rather than having to wait 30 or more days, you can better plan and manage your business operations.
You can learn more about the differences between bank loans and invoice factoring here.
Many Factoring Companies Offer Collections Services
Obtaining cash fast for your business is the number one reason businesses apply for invoice factoring services. But a secondary benefit is that in many cases, the invoice factoring company will take over your back-office collections and account receivables functions. This is a major difference between recourse and non-recourse factoring services.
Though not all factoring companies offer this service, most do as it can save your business a tremendous amount of time and aggravation. If this is an important add-on service for your business when considering an invoice factoring company, be sure to ask if you can outsource your collections or account receivables functions.
Invoice Factoring Can Help with Late Client Payment
One way to improve your business’s cash flow is by having clients remit invoice payment earlier than standard net 30 payment terms. But how do you do this? One way is to offer your clients what’s commonly called a “2/10, net 30” early payment discount.
This means that the client receives the cost savings of 2 percent from their invoice in return for paying their invoice within 10 days instead of 30 days. Some customers might jump at the chance to do this.
Invoice factoring companies are experienced at working with clients of various industries to set up such a payment plan. Early client payment also means your fees and costs to the invoice factoring company will be reduced.
Capital from Invoice Factoring Can Sustain Your Business Cash Flow
In summation, small businesses that are looking to get a better handle on their monthly business cash flow should take a look at factoring companies that can provide cash from accounts receivables invoices. Factoring Directory will allow you to find factoring companies near you or locate a specialized factoring company in your industry. By collecting on money that is already owed to you in less time, you can stay ahead of your financial obligations and move your business forward. And unlike a bank loan, which has to be paid back at a future date, with invoice factoring, there’s nothing ever to be paid back.