If you are running a business and need a quick injection of capital to help with cashflow, you may be thinking about getting a bank loan. Before you do though, there are other solutions available such, including invoice factoring. Utah factoring company Thales Financial say that invoice factoring for small business is becoming increasingly popular. But before you enter into such a contract with a factoring company, there are a few things you should know.
What is Invoice Factoring?
If you have never heard of invoice factoring, you may be curious as to what it is and how it could help your business. As you know, most customers will expect payment terms when they do business with you. This means that they will have a set amount of time (usually between 30 and 60 days) before their invoice is due. During that time however, your business may struggle with its own cashflow, particularly if you are a new business and do not have a lot of capital in reserve.
If you need to improve your cashflow, you can consider factoring, or ‘selling’ some of your outstanding invoices to a third-party factoring company. The factoring company will advance most (sometimes all) of the outstanding amount to you and will then take responsibility for collecting the outstanding amount from your customer when it is due. For this service, you will likely enter into a contract with the factoring company and will pay a monthly fee.
The Benefits of Invoice Factoring
It is easy to see the immediate benefits of invoice factoring. You will have an instant solution to your cashflow problems because you will not have to wait for a month or two to get paid. In many cases, you can get same day payment from the factoring company when you submit the invoices.
If you are factoring invoices, you are giving over responsibility for collecting payment from your customers, which means that you don’t have to worry about hiring staff to do this job for you.
With access to instant cash, you can then take advantage of prompt payment terms from your own suppliers. You won’t have to wait for customers to pay you before you can pay your suppliers and this may mean you can access discounts for on-time or early payments.
The Downside of Invoice Factoring
The benefits of invoice factoring can make it seem like the ideal solution to your cashflow problems, and for some businesses it is. But it is important that you are aware of the terms and conditions of a factoring contract before you enter it as these vary from one finance company to another.
You need to familiarize yourself with the fee structure that will be applied because you are likely to have to pay a set fee each month as well as interest that increases the longer an invoice is outstanding. This means that if one of your customers takes longer than usual to pay their invoice, you are going to have to pay more to the factoring company.
Another thing to bear in mind is that your customers might not like the fact that you have factored their invoices, especially if the factoring company is aggressive when it comes to collecting payment. It could have a negative impact on your relationship with the customer and could affect future business.
Invoice factoring can be the perfect solution in terms of cashflow generation. But it is important to be aware of the contract you are entering into before you use this method to raise money for your business.