25 Jun Cash Flow and Invoice Factoring

As a small business owner, you need to be on top of your finances at all times. Even if your business is healthy and doing well, it’s imperative that you always understand where money is coming in and where it’s going. Unfortunately, in some cases, you may be waiting for payments from clients and customers, which can put you in a financial bind. 

Today we want to talk about managing your cash flow through Factoring. If you’re not familiar with this service, it may provide better financial stability than going through traditional lenders like a bank. Overall, we want to take a look at how Factoring can help and whether it’s right for you. 

What is Factoring?

Depending on the kind of business you have, you may have a rotating collection of outstanding invoices from customers. For example, if you provide services (like catering), you invoice the clients, who can have a 30 to 60-day term to pay the remaining balance. 

Ideally, your clients will pay their bills promptly and in full. Realistically, however, this doesn’t always happen. If you’re stuck waiting for the money to come in, you may have to borrow against your invoices to ensure that you can stay solvent. 

That’s where Factoring comes in. This process is when you sell your invoices (accounts receivable) to a third-party, who fronts the majority of the amount (usually between 70-90 percent) immediately. Then, once the bill is collected, the remaining amount is paid to you, minus a factoring fee.

How Factoring Can Help With Cash Flow

As you can imagine, getting money right away from a third party can ensure that you always have funds coming into your business. Best of all, you can use Factoring only when necessary. Thus, if your cash flow is healthy, you don’t need to do anything. Once it starts to stagnate, however, you have this option. 

One of the reasons why businesses like Factoring is that it offers some incredible advantages over a bank loan or borrowing on credit. Here are the primary benefits of this process. 

Your Credit Doesn’t Matter

Factoring companies look at the credit history of your clients, not you. Thus, if you’re a new business with limited credit history, you can still borrow against your accounts receivable, assuming that your clients pass a credit check. 

No Work on Your End

The factoring companies will handle everything related to the invoice collection, including running the credit checks and contacting your customers. You simply pay the fee from your earnings, and they’ll do the rest. 

Faster and More Efficient

Rather than waiting for a bank to approve a short-term (bridge) loan, you can get money quickly. Also, if you work with a factoring company regularly and you have repeat clients, this process can be expedited even further. 

When Factoring Isn’t a Good Idea

If you have large invoices from clients, then this option may be right for you. However, if you’re managing a lot of small payments from a wide array of customers, the fees associated with this service may be prohibitively expensive. 

Bottom Line – Factoring Equals a Flexible Cash Flow

Managing your cash flow is vital to the success of your business. Thankfully, Factoring can help you maintain your company’s finances more easily, especially if you’re still new.