Did you know that 82% of small business failures are due to cash flow mismanagement?
If you’re having cash flow issues, it’s essential that you remedy these. If you don’t, you can lose market share, be forced to lay off staff, or even have to shut down operations completely.
Fixing cash flow problems can be a knotty problem for business owners. In many cases, to get more cash flowing into your business you need to increase expenditure.
However, there is one fast and easy way you can generate enhanced cash flow for your business. This is invoice factoring.
Invoice factoring is an old practice, but one which is also surrounded by a lot of misinformation. Some sources warn companies against all types of factoring, and others tout its benefits blindly. With all these conflicting opinions around, it can be hard to know whether or not to try out factoring.
Want to get clear on factoring? If so, read on, because we’re about to discuss the real benefits of factoring.
What Is Factoring?
Before we get into its benefits, what is invoice factoring exactly? If you aren’t familiar with the term, invoice factoring is the practice of selling unpaid invoices or accounts receivable to a third party. The invoice factoring company purchases the unpaid accounts from you for their value, minus a factoring fee.
After this, they then carry out account collection. In some cases, the factor assumes responsibility in the event that an account holder does not pay what is outstanding. In others, you are obligated to buy back the unpaid invoice.
Invoice Factoring Benefits
Invoice factoring has a number of advantages. It can facilitate fast cash flow, reduce account collection work, and doesn’t require collateral or sacrificing of equity.
Below we take a look at all the benefits of invoice factoring in more detail.
Improve Your Cash Flow (Fast)
The overarching benefit of invoice factoring is that it can improve your cash flow within a matter of days. If you choose a good factoring company to work with, the approval process is streamlined and quick.
After this, you can sell your overdue invoices and have the cash paid to you almost overnight. Different invoice factoring companies have varying time frames, however, in general factoring is a fast process that gives you access to cash within a short time frame.
This gives invoice factoring an advantage over other avenues. For instance, if you apply for a bank loan for your business, the approval process can take weeks or months to complete.
Another benefit of factoring is flexibility. After completing the initial approval process with an invoice factoring company, you can then factor your invoices with them on an as-needed basis.
As soon as cash flow starts to stagnate, you can sell off unpaid invoices and use the cash you receive to power your business operations. On the other hand, in months where cash flow is good, you aren’t under any obligation to factor invoices.
As mentioned above, approval processes for invoice factoring are usually quick. Besides being fast, they are also easy. Because the invoice factoring company isn’t lending you money, they don’t need to do a deep dive into your business and its financials.
Instead, they primarily want to gauge the quality of your accounts receivable and whether they will be able to successfully collect on them.
Because of this, invoice factoring companies typically require far fewer documents than banks and other credit institutions.
Less Account Collection Admin
Outstanding account collection can be a lot of work, especially if your business is large and offers generous terms to its customers.
Account collection can also take away focus from core operations. Its time-consuming and tricky nature makes it an area that many business owners neglect, even though being passive about past-due receivables is one of the top causes of bad cash flow.
When you use invoice factoring, the factoring company will take on the work of collecting your outstanding accounts. This frees up time and resources in your business.
If you choose a reliable factoring company, they will be able to collect your accounts efficiently and professionally, without impacting customer relations.
No Credit Utilization
Credit utilization can have a significant impact on one’s credit score.
If you take out a loan for your business, this will increase your credit utilization. On the other hand, if you leverage invoice factoring, you won’t be taking out any additional credit, which means your credit utilization rate won’t go up.
No Equity or Collateral Needed
To secure a loan or line of credit with an affordable interest rate, you will invariably need to provide some form of collateral. Invoice factoring doesn’t require any collateral, as you are selling your invoices for cash.
Another avenue that some businesses pursue to remedy their cash flow is selling equity. While this can generate cash fast, it does come with the cost of giving up a level of ownership in your business.
Invoice factoring doesn’t have this disadvantage. As long as you have unpaid invoices, you can apply to sell these.
Increased Scope for Growth
Cash flow problems can throttle the growth of any business. By giving you fast access to cash with no strings attached, invoice factoring can accelerate your business’s growth into the future.
Better Terms for Your Customers
Invoice factoring benefits aren’t confined to increasing your cash flow. Besides facilitating better cash flow, invoice factoring can also allow you to offer your customers better terms. Some industries are geared towards long payment terms, and shortening yours can rob you of customers.
With invoice factoring, you can extend attractive terms, while resting assured that you will be able to recover the invoices in a short time frame if you need to.