5 Benefits of Invoice Factoring
Businesses that face cash flow problems regularly should consider invoice factoring. In simple words, invoice factoring is the purchase of accounts receivables for cash, which is generally available within two weeks. Still, it is important to note that factoring companies normally buy invoices at a discount and then proceed to collect payment from the relevant debtors. This type of business financing has several benefits, including:
Easy and Fast Access to Cash
A business needs to maintain adequate cash flow that will enable it to finance its operations including paying its suppliers and employees, as well as settling other business overheads such as rent and utilities. However, a business that offers its customers credit facilities may run into cash flow problems, especially if the business offers relatively long credit periods to its customers or if most of the debtors fail to settle their accounts on time. This is where invoice factoring comes in handy. In most cases, businesses that approach companies that provide factoring services get financing within ten days. In comparison, a bank could take weeks or months to approve a business loan.
In order to grow, businesses need a steady cash flow. There are various reasons why factoring is good for business growth. To start with, it enables a business owner to focus on acquiring new customers rather than chasing debtors. Secondly, it allows a business to extend credit lines to its loyal customers who require credit facilities. Thirdly, it makes it possible for a business to pay its suppliers, and consequently avoid supply chain constraints. Fourthly, a business owner can focus on marketing his/her business rather than fending off creditors. These aspects can help you grow your business while competitors who are facing funding problems flounder.
Affordable Factoring Fees
The cost of accessing factoring services has fallen dramatically over the years. In general, factoring fees range from anywhere from 0.5 to 3.0% of a business’s turnover/business volume. It is worth noting that fees vary from one industry to the other. In addition, invoice factoring service providers normally consider the creditworthiness of a business’s customers, invoice volume, and how long it takes customers to pay.
Flexible Financing Terms
Accessing financing from traditional lenders such as banks can be quite challenging for most small businesses. This is because, when it comes to business financing, most mainstream financial institutions prefer to deal with established businesses and brands. Luckily, even relatively small businesses that would find it difficult to get financing from a mainstream financial institution can access invoice factoring services. This is because invoice-factoring companies usually look at the ability of a business’s customers to pay their outstanding invoices rather than the net worth of the business. Furthermore, a factor can easily provide more financing, if needed. For example, a business that experiences increased sales volumes may ask a factor for more money.
Reduce the Risk of Late Payments and Bad Debts
Late payments from customers and bad debts can cripple a business. Of course, you can take legal action against debtors who fail to pay their debts on time or are unwilling to repay their debts, but this approach can be costly and lengthy because you have to hire and retain a lawyer to represent your company. To avoid such a scenario, you should go for a factoring firm. Such companies have professionals who know how to deal with customers who are likely to make their payments late or fail to pay completely (bad debts).
Overall, invoice factoring is vital, especially for businesses that require a steady cash flow. Some of the inherent benefits of invoice factoring include easy and fast access to cash, reducing the risk of late payments and bad debts, affordable factoring fees, and flexible financing terms.