You’ve been running your business a while, or maybe you’ve just started one and you’re finding regular cash flow is a problem, as you wait for invoices to be paid.
You’ve got great customers – creditworthy, consistent payers, but you’re experiencing pressure on the finances in the time between you issuing the invoice and receiving payment.
While you wait for payment, you need to find the cash to pay off your own suppliers or staff. This means you might have to make a choice over dipping into your savings, using your overdraft or applying for a bank loan to tide you over until you’re paid. Applying for an overdraft, loan or credit card to bridge the cash flow gap adds debt to your business.
Working like this, invoice to invoice is not ideal because it doesn’t allow you space to invest in new customer acquisitions.
Factoring your invoices allows you to better manage cash flow in your business, without adding to your debt profile.
It’s not for everyone – there are fees to be paid and you need to be creditworthy and have creditworthy customers to be considered. You don’t receive the entire amount of your invoice upfront, but you do receive most of the cash a lot faster than if you were waiting for your customer to pay.
There’s an advantage here that helps you manage your business better. Knowing that you’ll receive payments in a timely manner, means you can ask for favourable, early payment discounts from your suppliers.
Having a regular cash flow allows you to plan better marketing initiatives; buy essential kit and employ more staff to keep up with demand. Having peace of mind, means you can focus on the strategic side of developing your business, instead of chasing payments.
Factoring organisations offer flexible approaches – some take on your entire collections portfolio, by issuing invoices and collecting payments. Others allow you to issue the invoice, but they take control of the collections. Ask what options they offer when you first enquire.
Invoice Factoring works by ensuring you receive payment, usually within 24 hours of your invoice being issued – much better than waiting for 30 to 90 days, depending on your customer payment terms.
Like any decision to be made, you want to have the full facts. Here we look at the Factoring advantages and disadvantages.