As an owner of a small business, you must be seeking out ways to improve your accounting procedures and also increase the cash flow of your business.
Invoice factoring could be one way of doing that. If you’re unfamiliar with this term, invoice factoring is a way to get capital out of your invoices now rather than wait for your clients to pay. It’s basically getting a line of credit against those invoices and then paying the money back once they have been settled by your client.
The process involves transferring invoices that you have already issued to your customers to the bank, in exchange for immediate payment of the invoices by the bank. The bank will also finance your accounts receivable, transferring your sales revenue more quickly into your bank account.
Invoice factoring can be used regularly, although is a short-term financing solution. It can be applied in addition to other financing solutions offered. A business that transfers its invoices to the bank through an invoice factoring can avail the following benefits:
- You can receive your due sale amount almost immediately.
- It is relieved of managing its accounts receivable.
- It protects itself against certain risks related to its current invoices.
Invoice factoring is quite popular lately and not only struggling businesses but firms of all sizes across all fields are using this service.
Benefits of Invoice Factoring
Depending on what situation your business is in, it could be appropriate to use invoice factoring.
- Business Growth
To obtain new service contracts, or to produce products in advance that customers will request, a business must spend money now (on hiring, purchasing materials and raw materials and paying subcontractors), while their customers will pay later. The more quickly a business grows, the more it will need considerable working capital. Invoice factoring can give the business room to breathe and expand.
- Flexible and Longer payment deadlines
In a highly competitive market, a business must find a way to set itself apart from others and offer clients particularly attractive payment options. If a business does not have the solid cash flow to do so, invoice factoring can provide the financial flexibility necessary to accept longer payment deadlines.
- Discount on suppliers’ payments
Certain larger suppliers can offer particularly attractive discounts for quick payment, but the business cannot benefit from this because it does not receive payment from customers as quickly. By monetizing its accounts receivable to improve cash flow, invoice factoring can allow the business to pay certain suppliers more quickly to benefit from their discounts.
- Protected financial ratios
Unlike loans and lines of credit, the amounts received in exchange for receivables transferred from the business have not considered a debt for the business. The use of invoice factoring does not negatively affect the financial structure of the business. There is no risk of defaulting on certain financial ratios that the business must meet.
- Stabilized cash-flows during a restructuring
When major changes are made to the structure of a business—as a reaction to an external impact or after an acquisition, for example—the business can easily lose control of its cash flow because it must manage its current operations more. In such a situation, invoice factoring can stabilize cash flow. The financial direction of the business can then focus on restructuring without being distracting by a short-term lack of cash flow.
- Better cash flows
Invoice factoring ensures better cash flows by bridging the gap between delayed payments by customers and a hurried response from the vendors to receive the payments from customers.
- Sales in foreign currencies
When a business creates an invoice in foreign currency, it takes on any risks related to the fluctuation of the currency exchange rate against the American dollar between the billing date and when a payment is received. If the exchange rate falls during this time, the company receives less than expected. Invoice factoring counters this risk by providing quick payment in American dollars before the exchange rate has had time to fluctuate.
- Speedy process
As mentioned above, you can get your money fast. Once you’ve submitted the invoices, you’ll have your cash within hours or a few days. Banks can take anywhere between one and two months to approve a loan and release the funds to a business. That’s not a problem with invoice factoring. With the newfound freedom of having the money fast, you can grow your business how you like without being bound by when clients are going to pay what they owe.
- No More Submitting Piles of Paperwork
Unlike traditional financing, which requires things like credit checks, financial statements, and tax returns, factoring typically relies on the creditworthiness of your clients and whether they’re likely to pay the invoices back. That’s why getting approved for this line of credit is so easy.
- Retain Relationships with Your Clients
Because you retain the ownership of your invoices, rather than selling the asset to someone who then collects on the debt, you don’t have to worry about harming the relationship between your business and your clients. You’re still there to maintain that relationship and ensure that there is nothing but good will.
- It’s better than a Cash Discount
Some businesses have incentives for clients to pay off their invoices quickly. This is done through a cash discount where businesses give a discount to clients if they pay the invoice within a specific timeframe. The hope is that they’ll pay them off faster and the businesses can get their money sooner. This still puts the control in the hands of the client, however. Clients can choose to pay off their invoices sooner and take advantage of the discount, but there’s no telling whether they will or not.
- Pay Off Bills to Protect Your Business’s Credit
Just like every consumer that looks for lines of credit, a business’s credit is tracked and will determine whether banks will lend money to them and what the interest rate will be. A business’s credit can even determine whether an investor will consider investing in that business. With that being the case, it’s a good idea to keep up with payments, bills, and debt that your business accumulates. By getting paid faster on invoices, you’ll be able to keep your business’s finances stable and avoid missed payments.