Increase Cash Flow and Profits with Invoice Factoring
You will undoubtedly be aware that staying on top of your accounts receivable is crucial for maintaining healthy cash flow. However, reviewing your receivables and making collection calls takes a lot of time. Even so, you also want to get the cash owed to you into your bank account as fast as possible.
One way to ease the burden of collections and get paid faster is to factor your sales invoices. But what is invoice factoring, and what are the benefits of this form of business finance? Here is an explanation of what invoice factoring is, along with ten of the benefits a small business can gain by factoring its sales invoices.
What is Invoice Factoring?
When you factor your invoices, you assign the invoice to the factoring company. The company will pay you immediately for your invoices and then collect the money from your customers. The factoring company will pay you the invoice value, less a fee, and less a small percentage of the invoice that will be retained until your customer settles the invoice.
What Are the Benefits of Invoice Factoring?
Even though you get paid in advance for your sales invoices, factoring is not a loan. A factoring company buys your sales invoices from you at a discounted price. The distinction between a loan and invoice discounting lies at the heart of many of factoring advantages. Here are ten of the benefits of sales invoice factoring:
1. Faster Access to Cash
One of the most frustrating aspects of managing cash flow is knowing that you are owed more than enough to meet your commitments. Yet, you cannot pay vendors because customers are taking full advantage of, or abusing, your credit terms. When you factor your invoices, the time lag between raising an invoicing and receiving cash is eliminated. In most cases, you will receive most of an invoice’s value within only one or two days.
2. Flexible Terms
Most factoring companies offer a range of flexible terms. You can set up an invoice factoring arrangement in a way that suits you. You are not tied into a long-term contract, and you can choose which of your invoices you wish to factor. Most types of invoices can be factored. However, factoring companies may not be willing to factor payments in advance, such as annual licensing fees, for example.
3. Smoother Cash Flow
Because you receive cash for your sales invoices immediately, it becomes much less challenging to manage cash flow. There are no sudden dips in available cash because one significant customer has paid their invoices late. The cash-flow smoothing effect of factoring also makes it easier to manage the timely payment of vendors. So, less time is wasted dealing with supplier collection calls and juggling with the available cash.
4. Increase Profits
Many businesses find that the cash factoring frees up can be used to increase profits. You will be able to pay vendors faster, for example, so you can negotiate better terms with suppliers. And you will be able to take advantage of early settlement discounts. The increase in available cash may also allow you to invest in new product development or boost your marketing efforts.
5. Off-Balance Sheet Financing
As already mentioned, factoring is not lending, so no liability is shown on your balance sheet, and unlike a business loan, there are no monthly repayments to make. Your business gets a cash injection and improved cash flow with no impact on the balance sheet.
Invoice factoring used to have a bad reputation for being an expensive form of financing. However, the cost of factoring has decreased significantly in recent years. The cost of factoring will depend on factors like the type of industry you operate in, the volume and value of your invoices, and your customers’ creditworthiness. You could receive an advance of up to 95% of your sales invoices, and factoring fees can be as low as 1.5%.
7. Improved Receivables Management
When you factor your invoices, the factoring company manages the receivables for you. So, you lose the headache that is collections. Depending on the type of agreement you have, your factoring provider may chase overdue invoices for you, and, because a factoring company employs professional collections agents, your receivables will be managed more efficiently.
8. No Restrictions on the Cash You Receive
The cash you receive from your factored invoices is yours to spend on whatever you wish. Unlike a loan or a leasing agreement, you are not tied to buying vehicles or equipment with your money. Invoice factoring is probably one of the most flexible ways that you can boost your working capital.
9. Increase Sales
Some small businesses are reluctant to offer customers credit because they cannot afford to wait for the cash. However, some potential customers will only do business with companies that do provide credit facilities. Factoring allows you to offer credit and still receive most of the value of invoices immediately. Your ability to provide credit will likely attract new customers and therefore increase sales.
10. No-Hassle Approval
Most businesses will qualify for invoice factoring. You do not need a perfect business credit score, and you do not need to have a strong balance sheet. Factoring companies are more interested in your customers’ creditworthiness than they are your business’s financial strength. So, gaining approval for invoice factoring is usually fast and hassle-free.
The Bottom Line
Invoice factoring is a cost-effective way to get the cash for your sales invoices faster. The increased cash availability that factoring provides has many benefits for a small business. Among its many advantages factoring is not lending, so there is no negative impact on your balance sheet. There is, of course, the cost of factoring to consider. Even so, for most small businesses, the benefits of factoring will outweigh the costs.
About Universal Funding
Universal Funding is a private funding source that has funded thousands of businesses and more than $2 billion since 1998. We turn your accounts receivable into the funding you need through invoice factoring and can have capital in your hands in a matter of days.