October 18th, 2013.
How invoice factoring can improve your cash flow
If your business is having problems with cash flow then invoice factoring could really help. Essentially it is a form of funding that uses an invoice as an asset against which money can be lent.
This method allows you not to worry about clients not paying or having payments given to you at random intervals, as the invoice factoring company deals with unpaid debts and provides you with guaranteed payments.
How does it work?
Essentially, invoice factoring allows you to receive financing against invoices that you have given to other businesses on credit or promise of payment. The lender will then provide you with a percentage of the total bill up front with the rest, minus the fee, being paid upon collection of the debt. This allows you to plan your finances with greater confidence, knowing that you will have the money coming to you on a certain date.
When should factoring be considered?
Businesses without an in-house credit department would benefit greatly from factoring; there are many options available to raise finance and it could be that other types are more suited to your needs. If you’re an SME who constantly struggles to get their clients to pay on time then this might be a great solution for your needs.
What are the benefits?
Besides the obviously improved cash flow to your business there are several other reasons to use invoice factoring, these are:
• Immediate access to cash – you can get a large chunk of the money owed straight away, meaning that you don’t have to wait for the client to pay or need to take out a loan. This will give you a positive cash flow which is much better for business.
• Eliminate restrictions of traditional lending methods – bank loans and over drafts only go so far, you may need access to more money than they have available or need a faster turnaround on acquiring the equity.
• Safeguard customer relationships – as the invoice factoring company are responsible for picking up the bills, you don’t have to worry about straining relationships by badgering them for money.
• Prevent breaches of agreements – once a contract is signed both parties need to ensure that they comply with the terms. It may be that you need the money before they are contracted to pay, by using invoice factoring you can gain access to this money in advance of this date.
These are the most obvious benefits of using this type of finance, all working to make your business run as smoothly as possible – boosting your cash flow and making relationships with your customers and clients much smoother.
Guaranteed cash flow
Money in the bank is the lifeblood of any company, without this you can really begin to struggle. Invoice factoring helps to give you a steady pulse of funds that allow you to grow and expand regardless of when your clients are paying. This finance option allows you to take action before your business suffers any major debts which could potentially sink you.