How Factoring Will Change the Way You Do Business

cf01102017Sales are up, but available cash is down ― most B2Bs suffer this fate eventually. Yet, despite how common it is for businesses to have cash-flow problems, many entrepreneurs remain baffled by how their business is doing so well and so poorly at the same time. The answer is almost always the same: Clients aren’t paying fast enough.

Most businesses that maintain accounts receivable experience the pain of payment delay. Because invoices tend to have terms of between 30 and 90 days, most businesses must endure a long period of cashlessness between the completion of a job and the compensation from a client. In the past, you might have meekly stomached the seemingly unending age of low funds ― but no longer. After you read this guide to invoice factoring, you won’t suffer from senseless cash-flow problems again.

What Factoring Is

A factoring company will buy your unpaid invoices or accounts receivable at a small discount, providing you the cash you already earned without the headache of waiting for a client to pay. It seems simple, but many business leaders get confused between invoice factoring and other cash-flow solutions. Therefore, it is important to note the differences (and similarities) factoring has with funding options like loans, advances, and discounting.

Loans

Loans provide varying amounts of cash, from microloans amounting to hundreds of dollars to jumbo loans of millions. Still, no matter how much money you borrow, you will always have to pay your lender back. Conversely, factoring merely provides the money you have already earned, which means factoring companies do not ever require repayment.

Advances

Some merchant services providers are more than willing to provide cash advances to a business. Typically, these advances are repaid over time by taking a sizeable portion of a business’s credit or debit sales. Once again, factoring differs because it never requires repayment. However, cash advances have exceedingly high interest rates, making them only appropriate for businesses looking for swift growth opportunities, and invoice factoring provides the same boon without the debt.

Discounting

In some foreign countries, such as the U.K., the terms factoring and discounting are used interchangeably. In these places, discounting is a type of factoring in which a business maintains the responsibility of chasing down creditors, even after receiving money from a discounting company.

However, in the U.S., discounting is a dramatically different process more akin to A/R financing. In discounting, the accounts receivable is used as collateral for a loan. Factoring is the sale, rather than the fronting, of your accounts receivable, requiring no repayment in the future.

The Benefits of Factoring

On one hand, your accounts receivable is the most cherished aspect of your business ― it is where you get your much-needed cash. On the other hand, accounts receivable can be a drain on your business, especially if you devote time and effort to chasing down clients that haven’t paid. In short, factoring allows you to claim the benefits of your accounts receivable without the risks.

Factoring resolves a company’s cash-flow problems in a matter of days. Unlike other funding, which can take weeks or months to complete, factoring companies can turn your invoices into money in as little as 24 hours. What’s more, factoring companies maintain no control over the cash you receive, meaning you can invest it in your business as you see fit: purchasing supplies or equipment, paying workers, marketing, or expanding with new locations or products.

Further, everyone profits through factoring ― save clients that never planned to pay. You get the cash you need, the factoring company earns a small slice, and responsible clients receive the same services and quality of treatment as before. Regardless of credit history, factoring companies treat clients with respect and professionalism, so you need not worry about losing customers. Delinquent clients may feel more pressure to pay, but since they already benefitted from your services, you should feel no remorse.

By choosing to factor your invoices or your accounts receivable, you can free your business from the fearful tedium of being cash-poor. With available liquid assets, you can revolutionize your business, growing in ways impossible without the opportunity to factor.

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