For a system that is shockingly simple, invoice factoring is still largely unheard of and as a result, is significantly under-exploited. Also referred to as invoice financing, factoring is a means of accelerating payment on outstanding invoices. Invoice factoring offers businesses the ability to survive through adverse times or reinvest with their improved cash flow in order to expand. Understanding this effective strategy and whom it is appropriate for could make a significant and positive impact on your business’s operations and growth.
How does it work?
Invoice factoring is a transaction by which a business sells their invoice to a factoring company at a reduced rate. In exchange, they receive a lump sum payment in advance (generally about 80% of the value of the invoice). Once the customer pays the invoice within normal trading terms, the factoring company releases the balance to you, less their fee (usually between 1-3%).
Invoice factoring is an ideal solution if you have credit-holding customers or sell to other businesses.
Offering customers an account is a good way of establishing a positive relationship and increasing customer expenditure. Commonly, accounts offer payment terms of either 30, 60 or 90 days. When customers have long account terms or are slow payers, a business’s cash flow can greatly suffer. This can result in the inability to pay staff and creditors; potentially damaging relationships and impeding the business’s ability to operate effectively or grow. So, if you regularly find yourself in situations with multiple invoices outstanding to you and are experiencing cash flow issues as a result, invoice factoring is for you.
If you are an entrepreneur or a start-up business, invoice factoring is perfect for you.
New businesses face a multitude of expenses in the first few years of operations. Commonly, start-ups require loans to secure property, insurance, inventory and cover marketing and staff-related expenses. Considering this, by the time the business has commenced operations, securing an additional loan as a means of accessing cash is fraught with restrictions and red tape. Unlike invoice factoring, loans demand an extensive application procedure, collateral and can take several months to gain approval. Furthermore, as they operate with interest rates and late fees, loans only serve to further amass debt and limit a business’s ability to grow.
Invoice factoring is superior because it is a no-debt solution. As factoring companies earn from the set percentage fee of the invoice, you can be sure of the fixed cost upfront; this diminishes the risk of the business over-extending itself.
If your business is suffering from financial stress, invoice factoring is a strategy to avoid insolvency.
If your business is experiencing a period of financial adversity, invoice factoring can be used to recover. By receiving an advance on receivables, your business can continue to keep staff employed and pay creditors. This ensures operations are sustained and prevents relationships with suppliers from being severed; buying time for the business to be reconstructed and revived. In addition to this, the ability to maintain good cash flow without adopting further debt is particularly beneficial in challenging financial circumstances.
Invoice factoring can fast-track your business’s growth.
If you’re looking to expand, invoice factoring is an excellent choice for your business. With accelerated access to funds, businesses can seize time-sensitive opportunities and focus on reinvesting in their company. Good cash flow affords businesses the ability to finance additional marketing, staff training, hiring, improving equipment and facilities and securing more property; ultimately allowing them to grow and thrive.
To learn more about invoice factoring and how it can help your business, contact the friendly team at Nova Cash Flow Finance here today.
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