Sometimes, businesses struggle with their cash flow because they have very little working capital. Furthermore, this is exacerbated because their own customers are either paying their bills exactly on the day these are due, or they are paying a bit late. Smaller firms in particular can be prone to cashflow problems that leave them struggling to pay their bills or staff wages while they wait for their customers to make payments. The most obvious solution would be to approach a bank or another lender to apply for funds. However, according to the experts at Thales Financial, there is another more quickly and easier solution known as invoice factoring. What is this though, and how could it help your business?
What is Invoice Factoring?
If the term invoice factoring is completely alien to you, then the following may be of interest. Factoring is the process of selling your invoices to a third-party company, which then allows you to improve your cash flow instead of waiting until the invoices are due for payment by your customer.
The way in which the process will work for you will depend on the contract you have with the factoring company. Some will pay up to 90% of the value of the invoice while others will pay only 80%. There are those factoring companies that will collect the payment from the customer when it is due and then forward the remaining amount to the business, after deducting their fee. Still, others will allow the customer to pay their bill in the normal way and will then collect the payment from the business along with a fee (this is typically referred to as invoice financing).
In most instances, the factoring company will charge the business a fee for the privilege. This is often a percentage of the invoice amount, with some charging as little as 1% and others up to 5% or more.
The following example might make it easier to understand:
Company A is having trouble paying its own invoices. It approaches a factoring company and agrees to submit invoices from some of its customers. One of its invoices is for customer B. The value of the invoice is $1,000 and the payment is due in 60 days.
The factoring company agrees to forward $800 to company A upon submission of the invoice and will charge a fee of 3.5%. After 60 days, the factoring company gets paid $1,000 by customer B. It forwards on the remaining $200 to company A minus its fee of $35 (3.5% x $1,000).
Is Invoice Factoring Right for Your Business?
The good thing about invoice factoring is that it is often quicker and easier to access funds than it would be with a bank loan. The factoring company will look at the credit worthiness of the business’s customers rather than that of the business, making the process ideal for new businesses in particular.
Some businesses like the fact that they do not have to spend time or money chasing their customers for payment because the factoring company does it for them. Many feel that the fees involved are well worth the time and effort saved in this regard.
Conclusion
Invoice factoring is a quick and easy way to improve business cash flow. If you have a new business with little credit history, it gives you a way to access funds to help you pay your own bills. This will ultimately keep your own credit score healthy. So if you need cash for your business, you may find that invoice factoring is perfect for you.