Business professionals from sole proprietorships to the Fortune 500 all have unique perspectives, but share the same insight on one issue. Many times it’s hard for a business to get paid what it is owed.
This causes serious problems for many businesses. Startup and even medium-sized businesses especially often lack capital reserves to get them through lean times. If a major client or several smaller customers do not pay, it could leave the business with resources stretched too thin to grow or even to operate.
Fortunately, many businesses can access a unique form of financing known as factoring. The benefits of factoring have led to expanding use among many companies.
What Is Invoice Factoring?
Invoice factoring represents a way for companies to get money owed to them on invoices from customers or clients.
All too often, those same customers and clients take their time paying their bills. Meanwhile your business has to wait for the money to come in before you can use it.
However with factoring, you get your money faster. A factoring company essentially buys your invoices from you at a percentage of their total value, usually about 80 to 90 percent. You get the money up front.
Then, the factoring company collects on the invoices, which have become their responsibility. These factoring businesses have greater resources to pursue collection on bills or can wait out the standard payment terms, which for your company might seem like forever.
How Does Invoice Factoring Benefit a Company?
Small and medium-sized businesses often operate with slim margins. Any setback in payments due to them can have a significant impact on how they do business.
Invoice factoring benefits a company in two ways. First it provides a company with money quickly. Many invoices allow for a 45 to 90 day period to wait for payment. While at least 45 days is standard, often a business cannot wait for the money.
Companies need money quickly for different reasons. In many cases, they themselves have bills, taxes, payroll, and other payment obligations of their own. These form much of the overhead that eats into profits.
In other cases, businesses need capital to pounce on a limited-time opportunity to grow, develop, and become more profitable. Businesses that even enjoy good cash flow could consider invoice factoring to ensure sufficient amounts of capital to take advantage of the opportunity.
The second reason for factoring lies in the fact that the practice effectively outsources accounts receivable. If fees charged by your factoring firm, deducted from the total worth of the invoices, are lower than what you would pay dedicated accounts receivable staff, you may wish to consider factoring.
Experts suggest, and we agree, that monies from factoring should be used for company spending or investments that add to the security and growth of the enterprise. Never use factored funds for frivolity or other purposes outside of the core functions of the business.
Who Should Be Using Invoice Factoring?
In our experience, most companies can use invoice factoring.
Companies that have solid and demonstrated capabilities, but low or inconsistent cash flow may want to consider factoring. They can then better plan how to use funds to pay obligations and invest in opportunities.
Companies that use factoring must also demonstrate discipline in spending. Some companies, just like many individuals, have trouble restraining spending. Indeed, poor discipline can lead a company to get behind on its obligations and affect cash flow. Factoring places a lot of money into a company’s hands at once. Wise decisions with that money are vital.
Learn more about how factoring can benefit your business. Call us today with any questions about how BP Financing can get your business paid sooner.