To a business owner, cash flow is the heartbeat of an enterprise. How can it not be when it is what you need to keep your employees, pay their salaries, and even fuel your company’s growth? Even so, sometimes, clients and service recipients can delay paying you. If this happens, your business could face some financial strains.
As a result, you may fail to venture into new business lines. You could also fail to pay your employees on time. And if you don’t communicate openly with your employees, you can have demoralized employees.
Nevertheless, invoice factoring comes in to solve this challenge. Invoice factoring can help you maximize efficiency in the following ways:
First, Understand Invoice Factoring
What is invoice factoring, you ask? It’s a form of financing that empowers businesses to exchange their accounts receivable in exchange for cash. In this case, the third party that receives the account receivables is the factor. Now you get where the name invoice factoring comes from. After receiving the invoices, the factor pumps cash into the business.
The cash comes as an advance payment. However, the amount of money the factor injects into your business depends on specific factors like your creditworthiness, invoice value, and the terms agreed upon.
With all factors under control, your business could enjoy up to 85% of your invoice value. In return, the factoring company will only deduct between 1 and 5% of your invoice’s total value.
This funding model works for both small and medium-sized businesses. It’s a game changer for companies with cash flow issues stemming from seasonal fluctuations and long payment cycles.
Another advantage of this financing model is that your invoice factoring approval depends on your creditworthiness. Your speed of repaying the bills will also position you better—no more worries about collateral and a good credit score and credit history.
Great! So now you know what invoice factoring is. Here are some of the ways it can help you maximize efficiency;
1. Invoice Factoring is Easy and Quick
Think of instances when your business struggled financially, but your credit history disqualified you from getting a loan that could have unstuck you. It happens often. Thankfully, the procedure of getting invoice factoring for your business growth isn’t as complex as the procedure of obtaining loans from traditional banks.
With invoice factoring, you don’t need to wait for customers to clear unpaid invoices. You can quickly get a factor to give you money to support your recurrent expenditures or invest in new growth opportunities.
Immediate access to cash helps you clear your payroll on time and avoid the demoralization that would come with delayed compensation. In addition, invoice factoring saves you the hustle of chasing down clients with unpaid invoices. Hence, it saves you money on making calls and fuel to drive to client’s bases.
It also saves you time, and you can spend this time researching new opportunities to venture into. The fact that you don’t need collateral and hefty documentation also makes the acquisition of funds through invoice factoring easy.
Invoice Factoring Improves Your Cash Flow Forecasting
With invoice factoring, it’s easy to forecast your cash flow stream. As the factor regularly sends in some money, you can predict future income streams. This way, you can plan better and make better-informed decisions. In addition, invoice factoring gives you protection against bad debt. Think of it this way: most factors only give credit checks to potential clients before buying their invoices. This reduces the chances of a client defaulting or failing to repay the money.
How Invoice Factoring Works
Once you’ve agreed to liaise with a factor, the factor will advance you up to 85% of your invoice’s outstanding value in just a day or two. Your factor will pay the remaining amount after your clients settle their accounts.
It means you’ll have a cash injection into your company almost immediately. And while invoice factoring appears to be a loan, it is not one. In any case, it will not appear on your balance sheet. Again, it will not affect your other lines of credit. The factor will take up the collection of funds from clients.
Choose the Right Factor
Many benefits await you if you agree to work with a factor. However, choose the proper invoice factoring company to guarantee your business growth. First, assess the reputation of the factor—research about their experience in offering invoice factoring.
Check online reviews—what are other clients saying about the factor? Ensure their fees are affordable. Also, inquire if they cater for set-up costs or have discounts on invoices. Be sure the factor explains all the charges associated with invoice factoring. The feedback you get from different companies will help you choose the most ideal factor.
Invoice factoring can fuel your business growth. It can free up the time to follow up with clients who still need to clear their payments. But it all trickles down to the choice of the right factor. The right invoice factoring company has transparent policies on fees they collect from your clients.
So, inquire about their collection process before settling for one.
Also, choose a factor that offers you flexible solutions. Best of all is to choose a factor whose solutions you can tailor to your business needs and drive your business growth.