Factoring receivables helps you to level the playing field and get the funding that your business needs to excel. Invoice factoring of receivables is a financial tool that allows you to sell your accounts receivable invoices to a factoring company that advances you up to 95 percent of the invoice amount minus the company’s processing fees. Here are six key benefits of invoice factoring that all small businesses should consider when short on cash.
Since 2012, finance experts have bemoaned the plight of entrepreneurs in need of bank loans. The recent disruptions in the global economic markets haven’t made small business lending with banks any more attractive. Even the loans prescribed by the Small Business Administration’s recent Paycheck Protection Program are fraught with red-tape, bureaucracy, and delays. Getting funds through an invoice factoring company assures you that you’ll get the money that you need as long as you have accounts receivable invoices to sell. The funding process is fast, and many factoring companies offer same-day funding solutions.
When applying for a bank loan, you’ll need to provide the bank with plenty of financial documentation before it will consider your application. Evaluating five years’ worth of your company’s financial statements and poring over your business assets give banks an idea of your creditworthiness. Banks use your credit score to not only determine if you’ll get a loan, but they also set loan terms based on those scores. Small businesses are often left with a proposed loan agreement that doesn’t meet their funding needs. If they are offered a loan in an amount that’s above their funding needs, they’ll pay for the unneeded luxury in high interest rates and other fees.
By using invoice factoring to get funding, you’ll get just the amount of money that you need at the time that you need it. Factoring companies don’t consider your credit score when buying invoices; they’re more concerned with the creditworthiness of your customers. If your customers show an ability to pay their invoice debt, then you’ll get your cash advances with favorable fee terms from the invoice factoring company.
After jumping through hoops to get a bank loan, you’ll incur a liability that’s really obvious. You’ll end up with debt. Debt is detrimental to most small businesses. While large amounts of debt in the form of loans indicate that a business has the capacity to expand its operations at any moment, it also shows a risk if the money isn’t used in the right ways. Debt on your company’s balance sheet is often a signal to potential investors that your business isn’t financially healthy enough to buy. Factoring invoices allows you to get the amounts of money that you need to meet payroll or expand your services without incurring debt with banks. Your balance sheet will show a company that’s financially sound for investors.
Everyone likes a favorable deal. Having access to funds through invoice factoring gives you the ability to pay your suppliers early. Suppliers often reward customers who pay early with discounted rates. These perks really add up when you purchase items in bulk from these vendors. If your supplier doesn’t yet offer early payment discounts on bulk orders, you can suggest this type of plan during negotiations. The money that you save through these discounts can be used to buy more items and steadily expand your company operations.
Debt collection is a time-consuming and tedious activity that many companies outsource. Legitimate debt collectors must know and follow all laws regarding debt collection, and they have to be persistent and systematic to recover even a small percentage of the debt amounts that are in the collection system. When you use their services, you’ll pay for their time and management skills. By selling your accounts receivable invoices to an invoice factoring company, you avoid the need for separate debt collection services. Your invoice factoring company has its own team of debt collection agents who specialize in recovering accounts receivable funds.
If your company is one of the few start-ups that can obtain a bank loan with favorable terms, it still may not have the flexibility that you need to grow your operations. Banks loan money for specific reasons. If you apply for a bank loan to pay for a new piece of equipment, the bank expects you to use the money to pay for that equipment. If an emergency happens and you need the money to meet payroll, your company will have to go back to the bank to revisit the terms of your loan agreement. The process almost always ends with small businesses getting higher interest rates or no funding for the activities that they really need to fund. The money that you receive through invoice factoring is yours, and you don’t need to explain to anyone how your company will use those funds.
The agility to respond quickly to market conditions is one of the key strengths of small businesses. You’ll need funding to leverage this strength, however. When banks give your business the red light, factoring receivables is a great way to keep your place in the market and to extend your reach when you and your team are ready to move forward.