Understanding the Basics About Factoring Invoices
Cash flow management is a perennial challenge to companies operating on invoice financing, and solving that challenge is usually the key to opening up a business’s potential for growth. While there are some differences to models of invoicing, they all share one problem, which is that you can’t really tell when customers are going to pay. Most of the time, most of the customers pay on time or close to it, but late payments just happen. When they do, they open your business up to consequences due to cash shortfalls, and factoring can help you restructure your income to avoid those issues.
Selling Invoices vs. Financing
When you use a factor instead of an invoice financing company, you’re not just getting a cash advance against money you’re owed. Instead, you are discharging the debt to a third party who takes on the risks involved with collection. While there is some gray area between the two due to specialty terms and contracts offered in the industry, factors offering no-recourse agreements do so with a full understanding of the risks of taking on collection. The additional risk involved in the no-recourse agreement is the reason factors offer a lower percentage of invoice face values than financing companies, too.
Factoring To Outsource Receivables
Some small business owners streamline operations by using factors to totally outsource the receivables side of the business. The factor pays them a relatively predictable percentage of the invoice upon approval of the agreement, the business owner takes the income and moves to the next project, and the customer pays the factor. It’s simple, and for the right business it might even save money over the cost of staff to do the receivables and follow up on customer payment due dates. This is especially useful in single-person operations where any additional bookkeeping work takes away from billable hours.
Managing Cash Flow
In addition to its usefulness as a method of outsourcing receivables and simplifying bookkeeping, factoring also works as a consistent and cost-effective method of managing cash flow. Sending invoices to a factor at regular intervals guarantees a lump of working capital comes into the business in cycles you can count on, and the occasional invoice that is paid quickly enough to avoid being sent to a factor provides a little additional bridge income in between the budgeted pay dates. It’s easy to fold the costs into quotes when you have a predictable pattern of business established as well.