As an owner of a small business, you might be learning about the many ways you can increase the cash flow of your business. One way to do this is through invoice factoring. If you’re unfamiliar with this term, invoice factoring is a way to get capital out of your invoices now rather than wait for your clients to pay. It’s basically getting a line of credit against those invoices and then paying the money back once they have been settled by your client.
With that in mind, the next thing you might be wondering is whether invoice factoring is the right choice for you. The best way to decide that is to look at its many benefits.
Invoice Factoring Is Only Limited by Your Sales
To take full advantage of invoice factoring, you have the potential of factoring all of your accounts receivables to get that cash in your hand. In just one to two days, you could have up to 85 percent of your sales available to you without having to wait until clients decide to pay the invoices off. This is a big advantage because it allows you to have the capital you need to grow your business.
Once the invoices are paid, you receive even more money, the 15 percent not advanced less the factor’s fee. Fees range from 1.25 to 3 percent per month, so the sooner the invoices are paid, the more money you’ll retain. The percentage depends on the credit worthiness of your clients.
It Doesn’t Increase Your Debt
Unlike other options for increased cash flow, such as loans, invoice factoring isn’t like typical debt. You’re not borrowing money on the basis that you’ll make more and then pay the debt back. This is money you’ve already made — you’re just taking advantage of the option to get it sooner. You know for sure that you’ll have that money to pay back (assuming that the debtor doesn’t default on the invoice), so it’s not as much of a risk.
As mentioned above, you can get your money fast. Once you’ve submitted the invoices, you’ll have your cash within hours or a few days. Banks can take anywhere between one and two months to approve a loan and release the funds to a business. That’s not a problem with invoice factoring. With the newfound freedom of having the money fast, you can grow your business how you like without being bound by when clients are going to pay what they owe.
By having the option of getting your money quickly, you can make lightning-fast decisions for your business. You’re in the driver’s seat and have the control rather than having to wait on a bureaucracy to say it’s okay for you to have the money.
No More Submitting Piles of Paperwork
Unlike traditional financing, which requires things like credit checks, financial statements, and tax returns, factoring typically relies on the credit worthiness of your clients and whether they’re likely to pay the invoices back. That’s why getting approved for this line of credit is so easy.
Retain Relationships With Your Clients
Because you retain the ownership of your invoices, rather than selling the asset to someone who then collects on the debt, you don’t have to worry about harming the relationship between your business and your clients. You’re still there to maintain that relationship and ensure that there is nothing but good will.
Some factoring involves the selling of invoices, which means that the ownership switches from the small business to the factoring company. Clients might feel a bit blindsided by this and feel that they’ve been given over to debt collectors, even though they haven’t had the chance to miss a payment. This can cause hurt feelings and possibly cause clients to avoid buying from your business in the future. By retaining the invoice and working on getting it paid yourself, you don’t have to worry about harming that relationship.
It’s Better Than a Cash Discount
Some businesses have incentives for clients to pay off their invoices quickly. This is done through a cash discount where businesses give a discount to clients if they pay the invoice within a specific timeframe. The hope is that they’ll pay them off faster and the businesses can get their money sooner. This still puts the control in the hands of the client, however. Clients can choose to pay off their invoices sooner and take advantage of the discount, but there’s no telling whether they will or not.
With factoring, the control is completely in your hands. You choose whether to get the money right away or not. If you want the money to come to you now, you can work with a factoring company to make that happen.
Pay Off Bills to Protect Your Business’s Credit
Just like every consumer that looks for lines of credit, a business’s credit is tracked and will determine whether banks will lend money to them and what the interest rate will be. A business’s credit can even determine whether an investor will consider investing in that business. With that being the case, it’s a good idea to keep up with payments, bills, and debt that your business accumulates. By getting paid faster on invoices, you’ll be able to keep your business’s finances stable and avoid missed payments.
There are a lot of advantages to using invoice factoring, but what about disadvantages? Just like with anything, there are some. One is that you’re responsible for paying back any money you borrow that’s not paid back through the invoice. Unlike with debt collection, where the debt is purchased and it’s up to the debt collector to get that money, with invoice factoring, you still own the invoice, so you’re held responsible if it isn’t paid.
If you’re looking for a way to help your business thrive, contact FSW Funding with any questions you may have about invoice factoring. The sooner you get started, the sooner you can have that cash in your hand.