In a perfect business world, we would offer products and services, sell and deliver them to our customers, invoice the customers, and immediately receive full payment of that invoice.
Unfortunately, our daily world of business is far from perfect, and invoices are often not paid as quickly as we’d like. Waiting for payment on your invoices while your stack of payables continues to grow can be a very scary position as a business owner.
Trust Protects Business Relationships
As business owners and managers, we work hard to develop relationships with our customers, as well as our suppliers and all the other contacts that help our businesses run smoothly. There’s a certain level of trust at work in these relationships – a service or product will be provided and that will be reciprocated by prompt payment.
The reality is that there is often a stage in between that normal cycle whereby a business is basically acting as a “bank” while they wait to be paid for the service or product they’ve already provided. This causes a domino effect, making it more difficult for that business to pay its own service providers and suppliers. Things become more and more tight and continuing to do business and take on more customers can become extremely challenging for a small business with this type of cash flow struggle.
Options to Maintain Cash Flow
While many businesses seek a form of relief or security by obtaining a line of credit from a financial institution, other options need to be considered. Some businesses don’t qualify for a line of credit, or can’t get enough credit to meet their needs. One option is equipment lease financing, which we mentioned in a previous post about cash flow. (See also the advantages of lease financing.)
Another option is factoring.
What Is Factoring?
Factoring, also known as “account receivables financing”, treats your invoices as assets. If a company has an invoice for a product that has been delivered or services rendered, the invoice qualifies for factoring. A business can sell their invoices at a discounted rate, allowing them to be paid when they need it most, increasing cash flow, and enabling them to continue to grow their business without waiting for slow-to-pay clients.
Advantages of Factoring
Because factoring is simply selling an asset of your company, it is not the same as borrowing. An advantage of this arrangement is that you are in control. If you have to borrow money, you are at the mercy of the lender. However, with factoring, you are in control because you determine how many invoices you want to sell, and when you want to sell them. You get to determine how much you need based on your current balance sheet.
Another advantage of factoring is “quick cash.” Most factoring companies guarantee payment within 24-48 hours.
To enable you to make informed decisions in future negotiations with clients, factoring companies also offer services to allow you to track the receivables, payment behaviour, and credit information of debtors.
You might think of factoring as immediate cash, accounts receivable administration services, and credit information all wrapped up in one helpful package.
We’re Here To Help
If you have more questions about factoring, or need more help with increasing the cash flow of your business, we’d love to help you in whatever way we can. Feel free to contact one of our leasing specialists today.
Also, be sure to check out Capital Now, one factoring company we featured on our Helpful Resources page.