The Power of Invoice Factoring To Help Your Company Grow
Constant cash flow is very important in ensuring a company’s capacity to pay for running costs and ultimately, business growth. Sometimes it can be difficult to maintain cash flow or find money to finance your business’s expansion especially if you have pending invoices that your clients have not yet fulfilled.
If you have floundering funds for your business, you can always use your own money as the business owner to fund your operations, but this isn’t always a sustainable approach. This means you might have to look elsewhere for capital and selling customer invoices is a good way of obtaining cash advances for your business.
Here are some of the benefits of invoice factoring for your business.
Instant Cash Flow
Invoice factoring provides you with a quick means of sourcing cash for your business. Sometimes you might need cash to pay your workers or retain a client with a big order, but your company does not have sufficient money in its accounts.
There are other forms of sourcing funds such as taking a business loan. Unfortunately, between filing for a loan and the bank’s approval, this process usually takes a long time; time that you may not have on your side.
Invoice factoring involves you selling your pending invoices to a factoring company. One significant benefit to this approach is how quick the process is. You can receive the money from the factoring company on the same day or within the next 24 hours. You do not have to wait for long to receive the cash.
Invoice factoring will help you get the cash flow you need in almost no time so that you can pay for your operational costs immediately or fund big client orders.
Provide Financing Without Incurring Debt
The money you get from invoice factoring is not a loan; it is your money. The only difference is that you have traded the invoice for a cash advance. The money you receive from the factoring company does not add to liabilities in your balance sheet and your company will retain strong financial books.
There’s also the fact that you do not have to pay any interest, unlike a business loan. The only cost you incur when selling your invoices is the factoring fee which is usually about a small percentage of the sum detailed in the invoice.
Funding Your Company’s Growth
It is the dream of every business owner to grow their company. No one wants to be in the same spot ten years after starting their company.
To grow your company so you can take more client orders, you’re going to require some capital. For example, if you have a transportation business with ten trucks, you can use invoice factoring to service your trucks or even buy more trucks for your company.
Invoice Factoring Is Affordable
While there are several options for financing your business, invoice factoring might be the most affordable option for you. When you sell your invoices to a factoring company, the only payment you make is the negotiated factoring fee. The factoring company usually deducts the factoring fee from the advance rate, usually between 0.5% to 5%.
Once you receive the money from the factoring fee, you won’t pay any more in factoring fees. The factoring fees are also negotiable and you can ask the company to deduct the fees you can afford to pay. There are a lot of factoring companies in the market today so you should do thorough research on factoring companies and compare their advance rates and factoring fees.
You should also exercise caution while reading the factoring contract to note any potential hidden costs.
It is Easy Getting a Factor
Selling client invoices to a factoring company is a straightforward and easy process. Factoring companies do not have complex requirements for you to fulfill before they can buy your invoices. All you need to sell your invoices are valid customer invoices but the factoring company can add other requirements depending on the invoice you’re trying to sell.
Your credit score and that of your company will not matter much. If you have bad credit or no credit at all, this will not influence the factor’s decision when buying your invoices.
Factoring companies will only check the credit score of your customers and share the information with you which is another advantage. Apart from paying you, factoring companies also save you from spending time and money researching your clients’ credit scores.
Spend the Money as You Please
One problem with financing your business with loans is the restrictions on how you spend the money. For example, if you took a loan to buy five trucks for your transportation business, that money should only be used for that purpose. You will incur penalties and fines if you use funds from the loan in expenses not specified in your loan application.
The cash advance you receive from the factoring company is yours to use in a way you deem fit. If you want to rent space for your office, pay your workers, buy more equipment, you are free to do so. The factoring company will not ask you how you are spending your money.
However, invoice factoring requires financial discipline; use the money on expenses that will only grow your business.
Pounce on Opportunities
You have to take all the opportunities you get to ensure your business grows. Invoice factoring is not only for covering small short-term expenses. It can help you finance big business opportunities that will increase the value of your company.
Invoice factoring is the best financing option for those last-minute expenses that might be huge for the company. For example, imagine a scenario where you land a potential client with an order worth six months of your income.
The client might not have time to wait for you to restructure your finances. You will have to come up with the money within a very short time. Invoice factoring will allow you to take up such an order and still maintain cash flow in the business for other expenses.
Reduce Risk of Bad Debts and Late Payments
In business, it is common to have customers that pay late or decline to pay. These late payments and bad debts if not handled properly, might lead to a slow-down or permanent closure of the business. There is the option of following up your money through legal action, but that will increase costs through lawyer fees and could take even longer to get your money.
Invoice factoring can be a method of reducing bad debts and late payments. A factoring company will check your customers’ credit and often take insurance to mitigate the loss of non-payment. They also know how to deal with non-paying customers, reducing the costs you would have incurred to recover your money. Invoice factoring allows you to get paid early and lets you focus on other customers.
No Collateral Required
When you apply for a business loan, the bank usually asks you to put up property as security. The bank will request you give them documents proving ownership of equipment, land, building, or something tangible with a value that the company owns. If you do not have any property to put up as security, the bank might decline to give you a loan.
Invoice factoring does not require collateral. All you have to present to the factoring company is valid customer invoices. Once the factoring company approves the invoices, they will send you the advance rate without requiring any form of security; something that you’d have to present to a bank if you were applying for a loan.
There Is No Limit
Invoice factoring does not have any limit on the amount of money you can obtain from the factor. The limit of the cash you shall receive is determined by the amount in the invoices you want to sell. The bigger the amount on your invoices, the bigger the advance rate you receive from the factor.
There Are Two Approaches to Factoring
There are two different types of factoring, recourse and non-recourse factoring. Recourse factoring dictates that you shall pay the factoring company if your customer fails to pay them.
In non-recourse factoring, you do not have to pay the factoring company if your customer fails to pay them. Having these options available will help you choose the one you think will benefit your company and help it prosper.
Invoice Factoring for Business Growth
Invoice factoring is essential to businesses that require a constant cash flow. Invoice factoring will help you grow your business by providing the much-needed capital.
If you decide to choose invoice factoring as a means of financing your business, do some proper research on factoring companies. Not all factoring companies will offer you all these benefits; compare their offers, terms, and conditions and search for reviews from companies that have done business with them.
Collecting payments can be challenging; if you have someone else collecting the payments, you can focus on refining your product or service so you can take your company to new heights.