Businesses need steady cash flow to remain afloat and ensure profitability. However, maintaining a steady cash flow is easier said than done for most businesses. That’s because of the unpredictable nature of business and wavering economic trends.
Imagine winning a contract that should ideally offset all business expenses, only to find out the client will pay you much later. This is a situation most businesses have to contend with, but luckily, there’s a way around it. Companies awaiting payments can always use invoice factoring to get quick cash for day-to-day business operations.
Invoice factoring is a novel concept for most business owners, but that’s where we come in. Join us today as we look at what invoice factoring is and why it’s so important for businesses to scale up.
What Is Invoice Factoring?
Invoice factoring is a financing option for companies where they sell their invoice to a third party for quick cash. The companies have to sell the invoice at a slightly lower price than the actual invoice amount. However, it’s a worthy trade-off given the convenience of the process.
There are plenty of companies where businesses can “factor” their invoices and unlock some fast cash. This service will remit around 80% to 90% as an advance. Only when the client pays the company will they transfer the rest of the money.
Typically you’ll have to pay a factoring fee of about 5%the value of the invoice. This doesn’t seem too much, but don’t forget you have to also pay the processing, application, and service fee. The total cost of factoring will be much more than the factoring fees
Can Invoice Factoring Help Grow Your Business?
Factoring your invoice is a great way to unlock some cash, but can it help scale your business? There are plenty of ways invoice factoring can help scale your business; here are a couple of them:
Provides Your Business With Working Capital
Businesses need cash, and lots of it, to maintain usual operations. Factoring your business allows you to get working capital for your business. That way, you can restock your inventory, pay employees, and fulfill orders.
Did you know improper cash flow is the reason why 82% of small businesses in America fail? Invoice factoring will help you sidestep imminent failure by giving you capital to stay afloat. It also facilitates proper budgeting and predictability of future finances.
This ensures everything stays in order and your customers remain happy.
Opens You Up to More Opportunity
Lack of adequate capital precludes most businesses from seizing opportunities that come knocking. It prevents you from taking on large projects that would take you to the big leagues. It gives you the funding to take on such projects without straining your finances.
Next time an opportunity comes your way, consider factoring your invoice to take full advantage of it. This is most common with large clients because they might take a while before they complete payments. Don’t leave high-paying clients to your competitors because of inadequate funds, yet you can factor their invoices.
Way Better Than Borrowing
Most businesses borrow loans from financial institutions and third-party lenders when they need financial assistance. However, loans may not be the most viable option for businesses with poor credit history. What’s more, the astronomical interest rates from third-party lenders are a complete turn-off for most businesses.
It’s no secret; most lenders have strict requirements that may be unfavorable for small businesses. Plus, most lenders have unreasonable restrictions for the amount of money a business can borrow. These businesses may not get enough money to achieve their objectives.
Invoice factoring is a way better alternative to borrowing for many reasons. First, factoring allows you to borrow almost as much as the invoice amount. There are no restrictions on how much you can borrow as long as it’s within the invoice amount.
Secondly, invoice factoring doesn’t have rigid terms that may restrict your spending. As long as you meet the invoice factoring company’s terms, you’re good to go. Lastly, invoice factoring won’t affect your credit score because there’s an almost zero chance of defaulting.
Gives You Better Control of Your Credit
The average small business owner in the US is about $195,000 in debt. Businesses weighed down by debt spend a good chunk of their time and resources fulfilling debt. Invoice factoring can help companies sidestep the debt burden by giving them more control over their credit.
Businesses can use the money they get from factoring their invoices to fulfill their debt obligations. This helps companies maintain and even improve their credit scores.
Sets You up for Future Success
With proper control of your finances and excellent credits scores, invoice factoring lays the foundation for future success. It takes care of most financial issues so you can focus on growing and expanding your business.
You can channel the money from factoring to stuff like marketing or recruitment. Factoring also ensures you pay all your employees on time to keep them happy and motivated.
Is Invoice Factoring the Same as Accounts Receivable Financing?
Contrary to popular thought, it is not the same as accounts receivable financing. Although they share a lot of similarities, one or two things make the two financing options different.
The main difference between accounts receivable financing and invoice factoring is who owns the invoice. With invoice factoring, you relinquish ownership of the invoice to the lender. However, with accounts receivable, your invoice serves as collateral that the lender can repossess should you fail to repay the loan.
Grow Your Business With Invoice Factoring
Invoice factoring is an incredible financing option for your business. If you meet the lender’s requirements, don’t hesitate to factor your invoice for convenient funding. Let factoring help take your business to the next level.
Start your application process now so we can arrange financing and help propel your business to greater heights.
