Maintaining a good health cash flow is the primary priority in any business. However doing so is more easily said than done and companies which are by all appearances doing really well financially can get into a fix. Many businesses which are looking for ways to fund their growth, pay off their bills and tackle their payrolls typically narrow down their options to financing by banks, however there is another option that they can consider – Invoice factoring.
What is Invoice Factoring?
Invoice factoring is a form of asset based financing in which a company uses the money that its customers owe as collateral for a financing agreement. When opting for Invoice factoring, the business will sell its invoices due to a factoring company at a discounted rate which will then collect the money from its customers and forward any due balances less charges back to the business. Know that the older the receivables are, the less their value becomes.
Is Invoice Factoring A Kind Of A Loan?
No, Invoice factoring is not a loan; it is a financial transaction between a business which is seeking funds and a factoring company. Since the factoring company will purchase the invoices, the business selling the invoices has immediate cash flow which it can then invest. Invoice factoring is a kind of a no-loan solution which is driven primarily by your customer’s demand for your products.
Bank loans Can Devalue Your Business
Invoice factoring is a good solution to traditional bank loans; especially in today’s economic scenario. More and more banks today have difficult to meet criteria which are no doubt affecting many people’s businesses. Even if you can get a line of credit, what options will you have when you exhaust it? If you have over due invoices, you will still have to wait in order to get paid.
You should also consider the implications should you happen to default on your bank loans, which will in turn affect your company’s credit rating and thereby make it more expensive for you to opt for other forms of financing. Invoice factoring not only eliminates such a scenario but it is also a lot more flexible.
Considering the Worst Case Scenario
As a business owner you owe it to yourself to consider the worst case scenario and be well prepared for it. Any business needs to think what if it ran short on funds?
Know that there are alternative and better means of financing available for you. Why let your unpaid invoices drain out your company’s resources when you can sell them and get paid within 24 hours. Most invoice factoring companies will purchase your invoices for at least 90% of their original value while some will give you as much as 98%.
With this much money immediately available you can take your business whichever direction you wanted to, pay bills and pay rolls on time and maintain a good, healthy relationship with your suppliers and staff. This is especially true if you run a business which needs cash now rather than later, so if you are fed up with late invoice payments go ahead and give invoice factoring a chance, it just might be what you are looking for to make your life easier.