Large companies have taken advantage of invoice factoring for hundreds of years. Factoring covers the time between the company’s submitting an invoice to a client and the date when the client actually pays the invoice. The company is able to receive their payment right away, which eliminates the problems that can accompany a slow payment on an invoice. The business bank accounts remain solvent, and the company can maintain a healthy cash flow.
Factoring Relieves the Financial Strain of Slow Pay Invoices
Big businesses generally have a better cushion than smaller businesses when it comes to dealing with slow paying clients. A small business might budget their receivables much more tightly. Since it is becoming more difficult to qualify for regular loans through standard banks, many small business owners may be facing shortfalls if they are not receiving client payments in a timely manner. Invoice factoring relieves the stress of waiting for a client to pay the invoice on time. Since invoice factoring is not a loan, it does not incur any additional interest costs, either. The money that the business earned is simply available right away.
Keep Cash Flow Current
Small businesses can avoid several potential problems when they take advantage of invoice factoring. Without factoring, a business could face a bad debt situation if they are unable to pay their bills. Factoring allows you to maintain a current cash flow without sacrificing any of the equity in your business, as you would have to do with a traditional loan. Your business accounts will remain current and you will be able to make all of your payments on time, no matter when the client actually pays the invoice you have submitted.
Avoid Offering Unnecessary Discounts
Many small business owners have resorted to offering discounts for customers as an incentive to get them to pay their invoices on time. If you take advantage of invoice factoring, there is no longer any need to offer a discount for fast payment. The payment will be covered by the factoring agent, so the client payment schedule makes no difference to a company’s bottom line. You can save a great deal of capital by reducing the discounts for things like early invoice payment. That capital can be invested in the company so that you can continue to grow your business instead of being held back by slow paying clients.
Banks Reticent to Offer Factoring to Small Businesses
Most traditional banks already offer invoice factoring to large companies. These banks do not like to offer the service to smaller businesses, however. It can be difficult for a company that is not factoring hundreds of thousands of dollars a day to qualify for factoring through a traditional bank. Small businesses typically do not bring in the large volume of invoices that the banks would feel comfortable factoring. That is the reason most banks do not offer invoice factoring services up front when you approach them for an operating loan. The service is reserved for the largest corporations in the market.
Alternative Factoring Resources
There are some companies that specialize in small business factoring. You can qualify with one of these companies if your invoices total between $10,000 to $100,000 per month. Factoring decisions are also based on the client’s credit rating rather than the credit rating of the small business. These factoring specialists serve all kinds of businesses, from manufacturing to service providers. If you regularly invoice clients for products or services rendered and you are not a large corporation, invoice factoring could be the best solution for keeping your company moving forward without relying on the pay schedules of your clients.
Jessica Bosari is a small business owner who believes in helping small businesses thrive. Her latest project is at Technology-Colleges.info, a site that helps students achieve their goals for information systems security jobs, computer networking careers, and other technology fields.
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