How to Improve Your Small Business Cash Flow with Factoring

March 20, 2017 / Reading: 4 minutes

Just because your business has hit a rut and needs a quick cash inject doesn’t mean you should take that as a sign weakness or a cause for panic.

In fact, many small businesses can experience situations where they aren’t in the red, yet do not have enough cash on hand to make investments because they have too much of their profits tied up in unpaid invoices.

Factoring can change this and free up these funds that are stuck in limbo.

What is Invoice Factoring?

Ultimately, B2B companies that are looking for new ways to finance their business will want to do it in-house, but if they can’t, the next best thing is through invoice factoring. This is an alternative to your traditional loan. Rather than borrowing debt, you free up your own cash flow by capitalizing on unpaid orders that are stuck in proverbial purgatory.

Technically, this means you lose out on some of this money that is owed to you, however, this money becomes absolutely useless if it is received well after you had to make critical cuts to your business. Factoring is not perfect, but its ability to keep business trending forward is something that cannot be overlooked.

Why choose Factoring?

Desperate situations call for desperate measures, so the fact that factoring provides a quick solution without immediate negative repercussions is a huge help. Invoice factoring is also very quickly approved, unlike traditional loans. Factoring service providers don’t have to do much hedging on their investments with invoices. They can quickly determine the overall value and make their offers after a quick background check on the history of the business.

Loan amountUp to $100,000Up to $500,000
Estimated APR13 – 68%16 – 62%
Time to Approval30 mn1 day
Time to Funding1 day1 day
Repayment term3 months6 months
Prepayment penaltyNONENONE

Factoring allows you to restructure your customer base without having to do the dirty work of legally collecting your owed monies from delinquent individuals. Uninterrupted cash flow is crucial to the success of your business.

Potential Obstacles

The administration can be very costly. You need to keep an eye out for concealed expenses, for example, application charges, a preparing expense for every receipt you fund, credit check charges, or late charges if your customer is past due on an installment, which can knock up the yearly rate (the yearly cost of obtaining cash with all expenses and premium included).

Since the organization may gather on the solicitations specifically, you have to ensure it is moral and reasonable when managing your client.

The organization may need to check the financial soundness of your client. On the off chance that the client has a background marked by late or missed installments, you may not be endorsed for the financing.

Differences between Financing

Invoice factoring is often mixed-up with invoice financing. One major difference is that with financing, your invoices are used as leverage in order to secure a cash loan and that you would have to handle all the paperwork with presenting the value of these invoices yourself. This isn’t an outright purchase of unpaid invoices and there are terms attached to this form of financing that may or may not prove beneficial to your current situation. In most cases, factoring is a far superior option for getting the money that you need in order to grow your business.