Invoice factoring is an important strategy for businesses of any size, and it provides an effective way to turn outstanding invoices into quick cash.
Having cash readily available is a real advantage for any business that has the need. As a result, improving cash flow is a common goal for many businesses. In fact, efficient cash flow is essential for any business that seeks to grow or expand. When a business is ready for expansion, it needs to pay off bills and pay its suppliers quickly. A reliable cash flow helps to ensure that a business can meet its needs in a timely manner.
Seeking loans for expansion from a traditional financing institution can be time-consuming and painful for the person charged with dealing with the bank. Banks simply do not give loans to just anyone, and without ironclad contracts, a business has more hurdles to jump over than a runner in a mile-long hurdle event.
Invoice factoring can help a business secure financial assets during a crisis situation, by converting most of its outstanding receivable accounts into cash. Factoring is the process of converting invoices into cash, based on the value of the outstanding invoices and the credit of the company's customers. In a standard sales transaction, a business can wait between 30 to 90 days to collect on payment from their customers. With a receivables factoring service, the business can have cash-on-hand within a few business days. Rates vary depending on the customer's history and the general background of the business, and the process is very different than obtaining a loan that requires payback.
When a business has multiple customer accounts and payment schedules, it can be difficult to keep track of incoming payments on a regular basis. Following up with customers, who do not pay on time, can lead to even more headaches. Sometimes, a business will need to hire an additional third-party to attempt to collect on any outstanding invoices. As outstanding accounts build up, a business must continue with daily operations that require the capital that those accounts should be contributing to the bottom line, causing additional financial shortages.
Overall, the result of the outstanding invoices can mushroom the loss of time and resources. Collecting on bad debts and calling on customers is a tedious process and can take away from a business's other projects and initiatives. This is where an invoice factoring company can help. Instead of waiting for payments, after these long billing cycles, a business can sell the invoices to another company that provides a portion of the funding in return. This system is called factoring, because it takes a percentage of the invoice, turns it into cash, and returns it to the business immediately.
It is important to note that invoice factoring is not a loan. Financial institutions, lenders, and banks impose a variety of application processes and fees to negotiate the loan. The financial institution may review the company's business credit, the company owner's personal credit history, and then it will make its decision accordingly. If a business has struggled recently, this may result in a loan denial and the business will be right back where it started. Invoice factoring works much differently.
The receivables factoring service does not require a review of the business' credit. In its place, the company will supply information on the receivable accounts instead, since this is the collateral of the request. The process is one of the oldest ways to obtain financing for business operations, and it can help the business increase working capital and profitability, without worrying about cash flow.
Any company considering loans against receivables should get familiar with the costs associated with this type of funding. The business will receive between 70-90% of the original invoice amount upfront, in most cases. This percentage value can change depending on the factoring fee imposed and the creditworthiness of the customer.
Some managers may look at the factoring expense as lost income, but when the time comes to pay employees and bills required for operation, it is better to have cash on hand than the invoice of a customer that has not paid for a service for a month or more. Invoice factoring allows businesses to enjoy a higher rate of closed transactions and encourages business growth in the process. Essentially, invoice factoring enables the business to make the most of its working accounts, even though it might have slow paying customers. Receivable finance agencies offer the immediate working capital that businesses need to strengthen their cash flow.
Finding the right invoice factoring company can take time, but it's important to locate a company that offers fast and efficient service and quality quotes. 1st Commercial Credit is a factoring company that provides accounts receivable financing, to companies in the USA, Canada and the UK. If your business is experiencing cash flow problems, needs additional financing for start-up costs, or has simply lost its line of credit, a company such as 1st Commercial Credit could help streamline the cash flow process.