If your business is like most others, you may find yourself waiting on customer payments while your own invoices need to be paid. You’d probably like to find some ways to stop waiting. Businesses that continually face these types of cash flow problems often turn to invoice factoring as a way to bridge the gap.
Invoice factoring uses your own accounts receivable as collateral to secure cash from a financing company. For a fee, the company will advance you a percentage of your accounts receivable and you receive the remainder when the invoice is collected.
Unlike a loan, you are not committed to a monthly payment or to an interest rate. You pay the agreed fee, and the finance company advances you the money based on the anticipated payment of your invoices.
When should you Factor?
Invoice factoring is a good tool for injecting cash into your business quickly. Businesses often end up with cash flow issues at one time or another.
Invoice factoring should be used for those few occasions when your business needs cash and cannot wait for the receivables to come through.
If you are attempting to find ways to grow your business, to increase your customer base or production output, invoice factoring may be a good option to get the cash you need. You can use this tool as a one-time financing option to get cash up front.
Or you may need the cash to complete a large customer order. In order to purchase the material needed to complete the large order, using your existing receivables will help to get the needed cash instead of using credit.
And, of course, there are always those emergency cash flow situations that may be beyond your control. Weather events, disasters, or world affairs could impact your business and your cash flow. These are the times when invoice factoring is a good financing tool to have at your disposal.
When NOT to use invoice factoring
Although factoring is a good tool to have in your pocket, it’s not the best option in all situations.
Like any type of financing, it costs money, and factoring rates are high. If you continually use it to stabilize your cash flow, you will constantly be spending money in the form of fees to fund operating expenses.
If you find that you need to rely on invoice factoring to maintain normal operations, you should take a hard look at your cash flow situation. Having to continually cover the gap in cash is an indication that your negative cash flow is impacting your business.
It’s key for any small business to understand their cash flow. While blips in the cash flow can happen to any business, you should be able to anticipate those times and plan for them.
Invoice factoring is a smart way to get cash into your business quickly. It can be used for those few occasions when you need to supplement your cash flow to expand your business or handle large orders.
Beware of using factoring to continually fund your business operations. By understanding your cash flow and using techniques to manage inflows and outflows, you will minimize the need to use to cover normal expenses.
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