Invoice factoring has developed a bit of a dual reputation in the financial and business worlds. On the one hand, it is shunned by people who do not understand it. On the other hand, it has become a welcomed addition to many businesses around the world. Whether you love factoring or you hate it, the truth is has become a cost effective, accessible and reliable way to fund your business.
Invoice factoring has changed considerably over the last ten years and has developed into a competitive funding product. Factoring allows a business to utilize its own invoiced sales to fund ongoing operations. With invoice factoring, a business can:
- Meet payroll obligations on time and in full.
- Pay vendors on time to improve the business’ credit rating.
- Have ready cash on hand to support day to day working capital needs
When a business begins its search for additional working capital, it needs to have a realistic assessment of what options are available, its needs and what it may qualify for. Given this brutal yet necessary assessment, many businesses find themselves with few choices.
If a business determines that the most accessible and flexible form of funding can be obtained through its receivables, then the smartest thing a business owner can do is to become more familiar with factoring and determine its strengths and weaknesses. A comprehensive understanding of factoring will lead a business owner to consider how a reliable cash flow anchored by invoice factoring can allow a business to grow.
Invoice Factoring Is Accessible to a Variety of Businesses
One of the great things about invoice factoring is that it can be utilized by a wide variety of businesses to solve a range of difficult problems. In many cases, invoice factoring is the only real option for businesses that have fallen upon hard times. Instead of hoping that the bank will save your business you should look at your aging report for the cash you need. Given that your receivables are one of your most liquid assets; why not take advantage of their value?
Invoice factoring can be used by:
- Businesses experiencing rapid growth
- Established & mature businesses looking to enhance their balance sheets
- Businesses that just want to improve cash flow
- Businesses looking to improve leverage
Factoring can help out in emergency situations, but it should also be considered as a valuable tool for businesses that are not experiencing financial problems. If you use factoring to turn your invoices into cash before your business starts to see economic challenges, then you are in a better position to avoid problems in the future. It is a smart move for many businesses.
A business can utilize invoice factoring when:
- A business is burdened by weak guarantors.
- A business has a negative tangible net worth, which makes traditional lending difficult.
- A business is consistently experiencing operating losses due to a constrained cash flow.
- A business has limited equity.
- A business has a highly leveraged balance sheet or trade payables.
- The extension of credit terms stretches cash resources.
Factoring services from a reliable financial organization have their place in any kind of businesses. If your business has weak credit and cannot get the funding it needs to meet its obligations, then invoice factoring may be a viable solution.
Factoring Has Evolved
Invoice factoring, as with any financial service, has evolved over the years to better meet the needs of clients and market conditions. It was not that long ago that the discount rates applied to transactions by factoring companies made the vehicle prohibitive to prospective clients with low margins. But a stable and reputable factoring organization can now offer competitive rates that make factoring a realistic and long-term option.
Computer and Internet technologies have also helped to improve the level of service offered by invoice factoring companies. Thanks to sophisticated Internet programs, a factoring company can now appear to be a seamless extension of your business to your customers and your employees. Managing your receivables and monitoring your aging reports has become automated and much more precise.
Factoring companies have also come to realize that they need to understand a client’s business before they can help that client succeed. It has become necessary for factoring companies to become experts in multiple industries and understand the financial challenges that their clients face. The sensitivity to the needs of each client has drastically improved, and so has the ability for factoring companies to put together customized plans that fit the specific needs of each customer. Many factors have focused on industry niches and have excelled in that space.
A factoring organization is one of the few funders today that can help establish a flexible funding solution based solely on your sales while putting businesses the full strength of its operational resources behind your business based solely on the economic viability of your client base. It is a long way from what factoring used to be, which makes the future that much more exciting.
Factoring Has The Benefits Entrepreneurs Need
Since invoice factoring is based on your invoiced sales, your funding line can grow right along with your business. The best part is that you never have to worry about whether or not you qualify for an increase in operating funds, because those funds are being generated by your quality accounts receivables.
Entrepreneurs enjoy several benefits when they utilize invoice factoring. Some of the more important benefits include:
- Equity preservation.
- True access to reliable funds, without the strings.
- Increased independence to run your business as you see fit.
- Professional back office support when it comes to credit extension, receivables monitoring and cash application.
- Quality management reporting.
Factoring Is More Than Just Cash Flow
Up until now, we have only discussed factoring as a way to enhance and improve cash flow. But when you get involved in an agreement with a professional factoring company, you begin to realize that factoring is much more than just a way to manage cash flow and receivables.
- When your business is able to sustain its operations utilizing a reliable cash flow, then that offers valuable peace of mind for you and your employees. Instead of always looking over your shoulder to see what kinds of past due bills could be coming to ruin your finances, you can look ahead towards the future with confidence.
- Unless your company deals in receivables and improving cash flow, then spending a lot of time worrying about your cash situation is a waste of resources. If your company manufacturers sporting goods, then you are much better served by focusing your efforts on making great tennis shoes and not trying to collect on your receivables. Factoring allows you to get back to your core competencies and invest time and resources into those activities that made your business successful in the first place.
- With factoring, your company has a win-win relationship with every aspect of your operation. Your company constantly has the operating capital it needs to pay vendors, meet payroll, and take care of daily operating expenses. You are happy, your employees are happy, and all of your external business relationships are happy. It is the perfect win-win situation.
Make Factoring a Part of Your Business
Every business needs a strong financial plan in order to be successful. But the problem with financial planning is that it counts on your customers paying their bills on time, which is not a reality of business.
Invoice factoring helps to give your business a clear plan for success by creating a sustainable cash flow utilizing your invoiced sales. When you can pay your bills, you are preserving your credit and enhancing the future of your organization.
Whether you love invoice factoring or you hate it; there is no denying its value to your business. You had a plan for starting your business, but you may find that sustaining that plan is much more challenging than you expected. Factoring eliminates the challenge and allows you to follow your original business plan to success.
Author: Marc J. Marin, Founder and Managing Director of NFIB member business Gateway Commercial Finance, LLC. Board Member of the IFA (International Factoring Association).