When it comes to running a business, there is a lot to think about. As well as doing what you do (i.e., selling a product or service), you are going to need to look after other aspects of the business, such as making sure that your suppliers are paid and that your customers are paying you on time.
If you are selling to other businesses, you are more than likely giving them a period of time to settle their invoices. Most businesses negotiate payment terms with customers when they set up their account. It might be that they will have 30 days to pay, but some larger clients can avail of 60 or even 90 days of credit before invoices are due. It is these favorable payment terms that often help businesses to secure the clients they want. Unfortunately, allowing customers a long time before their payment is due can have a negative impact on your cashflow, particularly if the business does not have similar terms with its suppliers.
Can Invoice Factoring Help?
There are a number of different options for businesses hoping to improve their cashflow, and invoice finance is one. According to the good folk at Utah-based Thales Financial, factoring invoices has become a popular method for businesses in need of access to quick cash.
Invoice finance is the process of selling customer invoices to a third party. It is not the same as sending invoices to a debt collector however because the debt is not overdue. What happens is that the factoring company pays the amount due by the customer to the business. When the invoice is due for payment, the customer settles the bill with the factoring company rather than the business. The factoring company then charges the business a fee for the service.
The cost of factoring is often a percentage of the invoice amount, and this varies from one factoring company to another. Oftentimes, the percentage rate will be higher if the invoice amount is higher. This is because the factoring company is advancing more money to the business.
Making Invoice Factoring Work for You
As there is a charge associated with invoice factoring, you might be wondering how it will help with cashflow. After all, will it not mean that your profits decrease?
Clever business owners can improve their cashflow with invoice factoring without suffering a loss. They do this by using the money that they secured from the factoring company to pay their own invoices early. If they are being offered early payment discounts from a supplier, they can offset the discount against the cost of the factoring.
Furthermore, by passing on the collection of invoices to a third-party company, business owners do not have to worry about hiring staff to chase customer payments. The cost of factoring is usually far less than the cost of paying a salary and benefits to a credit controller.
Another way to make invoice factoring work for you is by only factoring invoices from those companies that regularly pay on time without reminders. These companies will pay when the invoice is due, meaning you won’t have to pay any extra interest to the factoring company. You can keep a hold of the late payers yourself to chase up.
When faced with cashflow problems, business owners have a number of options, but a quick and easy solution is invoice factoring. This gives business owners the opportunity to access payment for their invoices before these come due. With some clever tricks, invoice factoring can boost cashflow and help a business to grow.