Two Best Times to Use Invoice Factoring
Even with your best efforts, being an entrepreneur will bring challenges. Sometimes it could be developing your customer base, while at times it could be a struggle to find suppliers or decide on business insurance. Small businesses owner are faced with many pressures as they look to secure their place in the market, and many of their challenges will ultimately affect their cash flow. Start-up investments require serious cash, and you may have invested every dollar in the location, materials or labor needed to make your business work. As things progress and your business grows, hopefully things will become easier. However, until that time comes, you may be interested in how invoice factoring can help with a reduced cash flow.
Factoring a common tool used by small businesses to access some cash rather quickly. In this process, slow customer accounts (outstanding invoices) can be sold to a third-party company called a factor. They will purchase the outstanding invoices, but for only a partial amount and potentially a fee of the invoice isn’t paid in a timely manner. Factoring companies often establish minimum amounts, requiring entire batched accounts be used for the advance. It is more advantageous for the factoring company this way, although your preference would be to simply pick and choose the invoices that present the least risk for the return.
There are two prime reasons for using invoice factoring.
- Fast funds.Although it may seem counter-productive to spend more to get less, the fact that you will have immediate access to cash- a working capital- makes it a smart choice. If you continue to wait on payment from customers who are dragging their feet, you jeopardize your operations. You may not be able to cover purchase orders or the labor costs. You can still meet your daily demands without sacrificing time or energy trying to corral customer payments.
- Simple, straightforward approval. As much as a bank loan or other traditional form of financing seems like the best option, consider the approval process and how that hinder your opportunity to secure funds. If you haven’t established positive credit history and business longevity, chances are you won’t receive any money from the bank. There is little concern with your personal state in factoring, as the company looks to the creditworthiness of the actual clients and value of invoices.
If you find yourself in one of these situations, invoice factoring might be the way to go for some access to working capital.