A major determining factor for the success of a business is proper management of funds. When a company is always strapped for cash to pay for day to day expenses, it is necessary to consider changing a few business practices to ensure that the company does not go into unnecessary debt. However, it is quite inevitable for any business to need cash and/or enhanced cash flow at some point in time. Either as part of capital used for expansion or to free up some of the funds held up in customer invoices.
A favorite funding source for many businesses is invoice factoring. Invoice factoring works by selling unpaid customer invoices to a lender who will then be responsible for collecting the payment. This process is what provides a bridge to the gap that exists between a sale and receiving payment. Most customers usually have a term of 30-90 days to pay their orders. Within this amount of time, a small business can have a crucial need for cash flow; any gaps can be bridged if you get invoice funding.
How does it work?
The process for invoice factoring is straightforward and simple. You will furnish a copy of the customer’s invoice to the lender who will then pay you up to 95% of the invoice value. The lender should then take control of the collection of payment from your customers. Once the customers pay the invoice, you will get the remaining value less any charged fees.
What are the benefits of invoice factoring?
Because it is a popular method of getting cash for the business, it is also essential to understand how beneficial it can be.
- Invoice factoring allows a company to improve their cash flow. There is no need for you to wait for the customer to pay. Instead, you can get the money right away and use it for operational expenses.
- You can take advantage of the funding for essential business goals such as buying new equipment, expanding your business, paying employees or acquiring additional products for inventory.
- A small business that uses invoice factoring can also reduce the expenses accrued by day to day operations. The company can also improve their creditworthiness by the timely payment of utility bills, payrolls, and taxes.
- It is also beneficial for small businesses that are having a hard time getting approved for other funding sources. It helps to eliminate the limitations of traditional loans and gives a small business the chance to expand.
- Invoice factoring is not considered a loan; hence, it will not appear in your accounting sheets as an expense. Invoice factoring makes the business finances look a lot stronger than when you have traditional loans adding up to the costs of the company.
- Finally, since the collection of payment from your customers will become the responsibility of the provider, your company can focus on other more important matters that will improve the overall operation.
Bear in mind however that invoice factoring may not be suitable for all types of business operations. You still need to determine your business requirements and limitations before choosing any alternative funding.