Sell Your Invoices to Improve Cash-Flow
Waiting for payment on goods already delivered can make a small business' cash-flow tight. Using invoice factoring is an effective strategy to moderate the ups and downs of the billing cycle, yet only one fifth of qualifying businesses take advantage.
There are several types of invoice factoring, including debt factoring, which can help with salaries, tax payments and other financial demands on your business during the slow parts of the billing cycle.
Invoice factoring explained
Financing by invoice factoring similar to invoice discounting; it’s a business to business service leveraging invoices of sold goods to get cash now.
Invoice financing, technically not borrowing, involves the financing business buying invoice receivables at a discount. Payment collection from the customer becomes the factor's responsibility. By including a non-recourse clause in your agreement, they also take responsibility should the customer default. Be sure to deal with a reputable factoring company. They will be dealing directly with your customers.
How it works
Before your customer makes payment on their invoice, the factoring services company purchases the invoice at a discount, often 70-90 percent of full value. Once the factoring company collects from the customer, they'll take an agreed upon service fee and return the balance to your company.
Why it works
There are several reasons invoice factoring is an effective option for your business.
- You can receive immediate payment for invoices, better managing cash-flow over longer billing cycles.
- Receive cash without effecting your credit rating. It's still best to compare rates and charges to traditional financing options, like banks.
- Invoice factoring helps manage risk. Pay bills and salaries on time, and have the cash on hand for unexpected expenses.
- Free up your time and your employees time. Moving collections to the factoring company gives you more time to work on money generating activities.
- Potentially save money. Costs associated with invoice factoring can be more than offset by reducing your collection management costs, because the factoring company manages the process.
- Good factoring companies ensure customers pay on time, shortening the payment cycle.
- Your ability to access more cash with invoice factoring grows as you increase your sales. As your invoices grow larger, your invoice financing increases. Stop renegotiating borrowing rates and credit limits with banks.
- By smoothing the ups and downs in cash-flow and allowing you to make payments when they're due, invoice financing can decrease stress levels.
Use invoice factoring to manage cash-flow
Invoice factoring services and associated fees can be negotiated based on your business' circumstances. Use full- or minimal-service options. The best thing, however, is probably to use the lowest level of services you need to reduce the time you spend on managing collections and more time on growing your business.
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