Does your business primarily collect revenue through invoices? Do you have fixed costs which need to be paid on time to run your business? Do you have difficulties getting your clients to pay their invoices on time? If while reading those questions you were reminded of the time that one customer who always pays late, or how you need to pay the never ending cascade of business expenses, you should consider invoice factoring.
What is Invoice Factoring
Invoice factoring is the practice of selling your invoices to a third party, who will then give you the majority of the invoice, and collect payment from your client at a later time. When they collect, they will then pay you the remainder of the invoice balance without a small fee they subtract.
The factoring industry exists to give you access to the funds you invoice for instantaneously. Having the lump sum from the invoice immediately can allow your company to pay needed expenses and operate with greater financial flexibility. Some of the industry leaders will be able to give you the funds immediately, whenever you send them an invoice.
Good Cash Flow is Vital
Good cash flow is necessary for you to run your business. You need to access the funds that will run your business in an easy, timely manner. If your clients are taking too much time to pay their accounts, your business will encounter countless issues.
You may not be able to pay your employees. You may not be able to pay your fixed costs, or make the necessary investments in your business. Simply put, good cash flow allows your business to run seamlessly.
The Best Invoice Factoring Companies
Deciding which factoring company to work with can be difficult. There are many reputable companies in the space. The companies vary in the percentage of the invoice they provide up front, what fee they take, and when they can deliver the lump sum. Doing a little research on the factoring industry can go a long way in informing your decision.
Different companies specialize in different sectors. Some offer benefits depending on your industry, like special fuel deals for trucking companies. If you work in an industry like trucking or construction, consider working with a factoring company whose benefits will line up with your costs.
Difference Between Recourse and Non-Recourse Funding
One important thing to think about when deciding which factoring company to work with is determining if they offer resource or non-recourse factoring. What’s the difference, you might wonder?
Imagine the situation where you give an invoice of yours to your factoring company, collect the lump sum, and go about running your business. Shortly after, the company you invoiced goes out of business and cannot pay the invoice. Who is responsible for that debt?
If your factoring company is non-recourse, then you will not be responsible. You will get to keep the lump sum, and the rest of the invoice will be paid to you whenever the factoring company is able to track down the debt. If they are not, all that happens is you lose the small balance which made up the rest of the invoice
However, if your factoring company is a recourse invoice factoring company, you will be responsible for the debt. Non-recourse is obviously preferable, though they usually take a higher fee. Before working with any factoring company, carefully go over their factoring agreement.
Other Cashflow Solutions
While invoice factoring can be a great option, it may not make sense for all businesses. You may not collect enough of your revenue from invoices, or your margins may be too tight for factoring to make sense. If this is the case, there are many other options worth considering.
Ways to improve Cash Flow
- Offer discounts for early payment
- Reduce expenses
- Consider financing
- Explore lines of credit
- Utilize business savings accounts
Depending on your business size and your credit score, there may be many attractive financing options available. Many banks offer attractive loans to small businesses, especially when there are favorable macroeconomic conditions.
One of the simplest and best ways to improve cash flow is always cost cutting. Think about your business expenses, and if any of them are avoidable.
