In every business, business owners are trying to gain momentum in order to make things easier and to do so working capital plays a crucial role. Probably all small businesses need a short term solution of generating working capital to manage daily operations.
Most business owners agree that it can be frustrating to wait for months before customers pay off their balances. If your business is experiencing low cash flow because of unpaid invoices, invoice factoring can help free up cash flow and keep your business going.
Invoice factoring allows you to sell your outstanding invoices to factoring companies in exchange for a lump sum of cash. Most factors pay around 70% to 90% of the total value of your invoices. They will then send the money to your bank account, which you can use immediately. The factoring company assumes the task of collecting payments. Your customers will pay their balances directly to the factoring company you’re working with. Keep in mind that factoring companies charge a transaction fee or discount rate for services rendered. They often take a percentage of the invoice amount.
Many small business owners choose invoice factoring mainly because it’s fast and convenient and another option might not work for you. Here are five valuable reasons why you should consider factoring your invoices.
Table of Contents
Steady Cash Flow
Most people think that factoring invoices are a one-time business transaction. If you think invoice factoring is right for your business, you can definitely establish a professional relationship with your factoring company. By factoring your invoices, you’ll have a steady influx of cash flow. You don’t have to wait 60 to 90 days before your invoices get paid.
Instant Working Capital
If you need immediate financing, forget about applying for traditional bank loans. These loans take time to process, and once you’re finally approved, it can take weeks before you receive the funds. Factoring your invoices gives you instant access to cash. Invoice factoring is a great option if your business is facing short-term financing needs or unforeseen business expenses.
Higher Chances of Approval
Unlike traditional loans, loan history, credit rating, and collateral are not a major concern when it comes to invoice factoring. Factoring companies are more particular with your customers’ payment history since they’re the ones paying off the invoices. If you have a low credit score or insufficient loan history, invoice financing may be a great financing option.
Build Business Credit
Invoice factoring is not a loan; instead, it’s a business transaction. It provides your business with additional working capital with the cash you already earned. Therefore, invoice factoring is a great way to build credit for your business since you’re not creating debt. It also helps you build a positive credit history for your company. You can improve your credit score by taking advantage of early-pay discounts, as well as settling previous business loans. Paying off your loans improves your credit score, as well as your business’ financial position.
No Need for Collateral
You don’t have to pledge your properties and equipment to secure the loan. With invoice factoring, the invoices themselves serve as collateral.
Focus on Business
Instead of wasting time on thinking, it allows you to concentrate on your business without worrying about insufficient money. Take control over your business and do things you want to develop your business.
With the number of benefits offered by invoice factoring, businesses in need of cash in a pinch should consider factoring their invoices. Eventually it one of the best option you can try and it always work for you regardless of your business size.