How to Use Accounts Receivable Factoring to Grow Your Company
One of the biggest obstacles for small business growth is access to working capital. Companies that have access to business financing, are usually better positioned to take advantage of opportunities - and - better positioned to weather challenges successfully than those that don't have it.
But getting working capital is a major challenge for most businesses, especially startups and small companies. Most will not be able to meet the requirements for a conventional business loan or line of credit. Plus, conventional business loans are usually offered to companies that have long track records of success and hard assets. Few startups and small businesses meet these criteria.
However, business loans are not the only way to finance a company. There are some alternate ways of financing that have started to gain popularity in the recent years. One alternative is called accounts receivable factoring, also known as invoice factoring.
Invoice factoring solves a very simple but common problem. Most companies that sell to other businesses have to wait 30 to 60 days to get paid. However, few can afford to wait that long. This is a major problem for small companies that don't have a strong balance sheet and need funds to pay suppliers and employees. Factoring provides an advance against your slow paying invoices and gives you the working capital to pay employees and suppliers. It puts you on a stronger financial footing, enabling you to take on new businesses without worrying about payment terms.
A factoring transaction works as follows. First you deliver your product/service and invoice the client. Then, the factoring company advances you up to 80% of your invoice. This is your first installment. Your company gets the remaining 20%, less the service fee, once your client actually pays for the invoice.
So the benefit is simple. You get 80% upfront and the rest once your client pays.
Invoice factoring is a great solution if your cash flow is not predictable and if you can't afford to wait 30 to 60 days for your invoices to get paid. It provides you with predictable cash flow, providing you with another tool to grow your company.