Is Invoice Factoring right for your business?
In today’s economy, business owners are all too familiar with the struggle to find the necessary capital to meet their operating needs or to finance business growth. While traditional small business financing (such as loans and lines of credit) is increasingly difficult to attain, many business owners turn to invoice factoring. Is invoice factoring right for your company?
Invoice Factoring (also known as accounts receivable factoring) is the selling of outstanding invoices (accounts receivable) at a discount to a factoring company who provides immediate cash to your business. Normally the value assigned to the receivables depends on their age (i.e. a more current invoice will be worth more). Generally, invoice factoring is also known as accounts receivable financing, accounts receivable factoring, or accounts receivable funding.
The Benefits of Invoice Factoring
Immediate increase in working capital: Factoring releases the cash a business typically has tied up in accounts receivable and makes it available for paying expenses or for funding growth.
Predictable cash flow: Eliminate the Burdon of waiting for payments from customers. Instead of waiting 30-90 days, a business can factor invoices and get paid immediately.
No new debt: Since factoring is not a loan, it doesn’t appear on the balance sheet as debt. Instead, it appears as more cash and fewer accounts receivable.
Offer better credit terms: Offer customers better payment terms without creating cash flow problems. Normally, when a business factors their customers’ invoices, they receive cash right away regardless of the terms granted to their clients.
Go after big accounts: Offer credit terms demanded by large, slow-paying corporations without depleting cash.
Take advantage of supplier early-pay discounts: Most vendors offer discounts for early payment. With the predictable cash flow provided by factoring, a business can take advantage of early-pay discounts, improve their credit rating, and offset the cost of factoring…all at the same time.
Spend more focusing on growth and less time managing receivables: Since factoring companies are experts in accounts receivable management, they provide the capability for businesses owners to spend less time managing receivables, and more time managing their business.
Back office support: Businesses can reduce the overhead costs associated with managing accounts receivable and the processing of payments. These are services that are usually included with invoice factoring services.
As all business owners are acutely aware, an uninterrupted source of cash is the most vital element in the survival of a business. It shows where a company may be headed. Instead of hoping everything will work out, business owners can enhance their cash flow with Invoice Factoring. When cash flow becomes predictable and controllable, the business is in a much better position for continued business success. In today’s lending environment, where traditional financing sources are continuing to fade, invoice factoring presents a welcome alternative.
Taking the plunge into invoice factoring could mean the difference between the successful growth of a business or remaining stagnant or even worse. You should first consider all your options, and then spend the extra time needed to examine the companies you are working with. Carefully review contracts and work hard to negotiate discounts. In the end, using invoice factoring can provide immediate cash flow to meet your business needs.
Sr. Vice President of Operations at Charter Capital, a leading invoice factoring company for small to mid-sized businesses. Headquartered in Houston, Texas, Charter Capital provides accounts receivable financing and asset-based lending for major industries including freight and transportation, consulting firms, service providers, staffing firms, distributors and manufacturers, an oil and gas service companies.