Use Invoice Factoring to Improve Cash Flow
Cash flow is a critical aspect of maintaining a healthy business. Regardless of how successful your business may be, you can still encounter challenges with cash flow. These difficulties often arise due to the time gap between providing products or services and receiving payment for them.
While your balance sheet may appear robust with a high debtor balance and sufficient cash on hand, having a large sum of money owed to you can hinder business growth and, in some cases, lead to failure.
If you run a successful business with a healthy balance sheet, securing loans may seem like a viable solution to address cash flow issues. Banks and other financial institutions are generally willing to lend to businesses that have proven success in selling their goods or services. However, accessing loans can be a time-consuming process, requiring extensive documentation and verification of your company’s status. Delays in obtaining funds could result in lost sales.
How Can Invoice Factoring Help?
This is where invoice factoring can be instrumental in helping your business. Your outstanding invoices are assets that can be sold, and invoice factoring companies specialize in purchasing these debts. With invoice factoring, you can continue offering credit terms to your customers while ensuring immediate payment for your products or services.
How Does Invoice Factoring Work?
Implementing invoice factoring is relatively straightforward, but some groundwork is necessary. The factoring company will assess the creditworthiness of your customers in advance, and it may be beneficial to engage in discussions with your customers before proceeding with factoring.
Once you have an agreement with an invoice factoring company, you provide them with copies of the invoices you wish to factor. The factoring company verifies the invoices with your customers, and upon confirmation, they pay you a percentage of the invoice total immediately. This percentage is determined by your contract with the factoring company, typically ranging from 80% to 90% of the invoice total.
The factoring company becomes the owner of the debt, and your customer becomes obligated to settle the invoice with them. Once your customer pays the outstanding debt, the factoring company will remit the balance to you, deducting their factoring fee, which usually ranges from 1% to 2% of the total invoice value. The specific fee structure is outlined in your contract, taking into account the nature of your business and average invoice values.
What Happens if the Customer Doesn’t Pay?
Regarding the potential default on the debt, the responsibility for payment depends on the type of contract you have with the factoring company. Recourse contracts are more common and have lower fees. With a recourse contract, you agree to refund the factoring company for any unpaid invoices after a specified time period. In contrast, non-recourse contracts incur higher fees, as the factoring company assumes the risk of unpaid invoices.
What are the Advantages of Invoice Factoring?
Invoice factoring offers several benefits. It provides swift access to cash immediately after a sale, ensuring liquidity and facilitating better financial planning. Additionally, it reduces credit control costs, as the factoring company takes over the responsibility of collecting debts from your customers.
What are the Drawbacks of Invoice Factoring?
However, there are also potential drawbacks to consider. Relinquishing credit control to a third party may strain your customer relationships if the factoring company employs overly aggressive or unprofessional debt collection practices. It is crucial to choose an established invoice factoring company that prioritizes your interests and maintains professionalism when dealing with your customers.
While the percentage fee per invoice in factoring is relatively low, it can accumulate to a substantial amount if you have a high turnover. If you utilize factoring for a significant portion of your invoices, the cost can exceed what you would pay for alternative financing methods.
The Bottom Line
Invoice factoring can be a valuable solution, particularly during the early stages of your business or periods of significant growth. To determine if invoice factoring is the right fit for your business, contact Universal Funding today at 800.405.6035 or complete our rate form. Our experienced factoring specialists will be glad to assist you.
About Universal Funding
Universal Funding is a nationwide invoice factoring solutions leader, supporting growth-focused businesses with scalable factoring solutions. With its invoice factoring, payroll funding, and purchase order financing services, Universal Funding provides clients with the working capital needed to grow and support their businesses without taking on new debt. Ranked as one of the nation’s top invoice factoring companies, Universal Funding provides cash flow financing for businesses all across the United States.