Getting paid by customers can take a while, and the delay can make it difficult to cover expenses and grow. This makes invoice factoring an attractive option for businesses that want to improve their cash flow.
An independent factoring company can help a business accelerate its cash flow. However, a bank factor offers a number of advantages that can make it an even better solution.
Streamlined Invoice Processing
Invoice factoring can save a company a lot of time and money because it’s far quicker to get funding than a traditional business loan. While business loans require a lot of documentation such as tax returns, accounts receivable aging, inventory reports and sometimes even personal financial statements, invoice factoring is much easier to qualify for.
Companies can start receiving funds from their factoring company within days of submitting invoices to them. This gives businesses a cash boost to cover immediate expenses and fuel growth opportunities.
Another benefit is that the factoring company takes over credit control so they can chase down unpaid invoices more aggressively than a business would be able to do on its own. However, this can damage customer relationships if the factoring company follows up on invoices in a harsh or inappropriate manner. The best way to avoid this is by choosing a factoring company that offers CHOCC (Client Handles Own Credit Control).
Increased Cash Flow
Invoice factoring helps businesses to access cash faster by selling invoices to a factoring company. The company takes on the responsibility of collecting payments from customers, and will contact them directly to manage this. This may create a red flag to some customers, however it is typically much easier than trying to secure a business loan and requires less information about the company’s creditworthiness or operating history.
Rather than holding onto their accounts receivable for an extended period, the business receives an immediate injection of cash that can be used for expenses like payroll, inventory, and new opportunities. This is particularly useful for young companies who are often in need of quick cash to take advantage of growth opportunities. It is also less risky than a traditional loan, as it doesn’t appear on the balance sheet and can be a better option for companies with bad credit.
Timely Payments
If your company is experiencing problems getting paid on time, a simple solution is to speed up payments by incentivizing customers to pay early. You could offer a discount on their order or invoice to encourage them to pay quickly.
Alternatively, you could also consider accelerating your billing process by sending out invoices immediately after jobs are complete or orders are shipped. This will get your business a cash boost and prevent the occurrence of late payment.
Factoring companies can provide a non-traditional financing solution to businesses struggling with cash flow by purchasing the receivables at a discount. They will usually do a credit check on your business and its customers to assess the likelihood that they will remit full payment for the invoiced amounts. Some factoring firms will also provide confidential factoring, where your customers are not made aware that the invoice is being sold to a third party.
Reduced Administrative Costs
Invoice factoring allows companies to improve their cash flow by getting paid for invoices sooner rather than waiting 30, 60 or 90 days for customer payments. This reduces the time needed to manage accounts receivable and enables businesses to invest more money in marketing or growing their business with new customers. When choosing a factoring company, make sure they have transparency about their fees and collection processes. A factor should also be able to provide detailed information about your business, including its credit and transaction history.
It’s not uncommon for a small business to have unexpected expenses or opportunities pop up that require quick cash in hand. Fortunately, with the right procurement strategy and invoice factoring loan, companies can quickly get access to funds to take advantage of those growth opportunities. This is especially important for SMEs who often struggle to secure financing because they lack collateral or have a poor credit score.
No Credit Checks
A business may be able to obtain financing without a credit check through invoice factoring. However, a factoring company must examine a client’s customers and their likelihood to remit the value of an invoice. They look at a client’s customer credit ratings, accounts payable history, and if there are any outstanding legal issues.
Sophie’s Churn, a maker of premium yogurt, achieved local success selling to gourmet stores and a large health-conscious co-op. But their list of supplier payables grew faster than their own profits, leading to cash flow issues. Factoring helped them settle those supplier invoices and get the cash they needed.
Unlike traditional loan options, which take months to process, invoice factoring gives your business immediate access to funds by removing the wait between the time you create an invoice and the payment due date. This enables your team to focus on growth strategies and acquiring new clients rather than worrying about funding gaps.
Flexibility
Many small- to medium-sized businesses struggle with cash flow gaps that can keep them from covering payroll, paying business expenses and potentially seizing a new growth opportunity. If your company is experiencing this kind of stress, you can improve your business cash flow through invoice factoring.
Factoring companies provide a flexible funding solution that allows you to sell your accounts receivable at a discount, then they’ll advance you a portion of the value of the invoices and take on the risk of collecting on them. Unlike a bank loan, you don’t need excellent credit or collateral to qualify for invoice factoring.
For some businesses, the ability to reduce their accounting department’s workload and pass debt management responsibilities to a third party is a big benefit. In addition, factoring is often cheaper and easier to obtain than a bank loan. It also doesn’t require a personal guarantee from the business owner, which is good news for startup businesses.
