How Your Business Can Benefit From Factoring
One of the biggest internal challenges that business owners is maintaining a steady and healthy cash flow. Between payroll, waiting for customers to pay on aging invoices, and regular business expenses, a business can experience a strain on cash flow which can greatly hinder growth. To ameliorate this, many business owners are turning to factoring.
What is factoring?
Factoring is when a business sells its unpaid invoices to an external company (called a “factor”) in exchange for immediate cash. Factoring companies buy the invoices at a slight discount (which is how they make money), and the business receives an influx of working capital which can be used to pay off bills, restock inventory, meet payroll, complete projects, or simply send that money to the bank.
When a business experiences a strain on cash flow that keeps daily operations from functioning optimally, or put a company in a situation where running payroll puts finances in the red – they often look to taking out short term loans to cover expenses until customers pay their invoices. Loans mean taking on debt, and that can mean spending more in the long run to pay off those loans. Factoring invoices gives a business access to immediate cash without taking on debt or conforming to the terms of traditional bank loans.
One of the major strains on cash flow is the aging period on customer invoices. Waiting 30 or more days to receive payment can cause daily operations to grind to a halt. Factoring agreements can be arranged in under 48 hours, and invoices submitted to the factor can be processed and turned into cash within 24 hours after that. Rather than waiting on the aging window for receive payment from customers, business owners use factoring to get immediate cash.
Get rid of accounting headaches
Once unpaid invoices are submitted to a factoring company, they assume the responsibility of tracking down payment from the customers. This means businesses will have more free time and resources that would otherwise be devoted to ensuring customers paid on time. That influx of cash from factoring also means projects no longer have to be postponed, and projections can say on track, rather than waiting for payment to arrive from customers.
Factoring for the long term
While factoring is a great way give a boost to a company’s cash flow for the short term, many business owners build long-term relationships with factoring companies in order to ensure a steady cash flow. The small fee charged by the factor far outweighs the benefits of having a fast and steady influx of revenue, which means business owners do not have to take out loans to cover gaps in cash flow, and the business can successfully grow to take on larger customer orders and make higher volume sales.