Invoice factoring is one of the most effective ways for small and medium-sized businesses to manage their cash flow, maintain or increase their working capital, and grow their business. Factoring invoices, for non-cash businesses, is the equivalent of credit card services for cash-based businesses. The service, in effect, pays your sales invoices within 24 hours in exchange for a small fee, rather than you waiting a minimum of 30 days for your customers to pay you. This process has many advantages. Here are five of them.
1) Better Cash Flow
Few small and medium-sized companies can demand that their customers pay them on a given day. Payroll, taxes, utility bills and suppliers which are critical to your own business operation, must all be paid on time. Cash flow can be a problem unless you factor your invoices.
2) Lower Costs
To solve the cash flow problem, many businesses arrange lines of credit from their bank. These lines of credit are, typically, far more expensive than the factoring fee. You can, therefore, lower your costs and improve your cash flow at the same time.
3) More Time Working on Your Business
Factoring means you do not have to spend time chasing your customers to pay the invoices you sent, and you do not have to wait for your accounts to be audited before you can approach your bank for a line of credit. You can, therefore, spend your time improving business performance. You know your cash flow is secure, so you can spend your time negotiating better deals with your suppliers. You can offer lines of credit to new or bulk-order customers in order to win new business. You can buy the new equipment you need to increase productivity. All of these will encourage your business growth.
4) Greater Flexibility
A less recognized advantage is the flexibility that factoring offers. You decide which of your customers and which of their invoices you will have factored. You can change this to suit your business cycles. If you decide to increase the line, you simply agree to add more customers, or more invoices that go to existing customers, to the factoring service. This takes very little time compared to arranging an increased credit line with a traditional finance house.
5) Avoid Bad Debts
When one of your customers fails to pay you, in a traditional business setting, you are on the hook for the bad debt. If they never pay, you could lose a lot of money. With invoice factoring you can choose a service level which means you are never on that hook.