Your business thrives or dies by your cash flow. A consistent flow of cash will help you to keep your debts current and ultimately save money on penalties, interest, and fees.
Of course, one important element of keeping a positive cash flow is collecting on your invoices. One method that many businesses have found to maintain cash flow is through invoice factoring.
What is Invoice Factoring?
Invoicing works much like credit. When you issue an invoice to a business or other customer, you give them a certain amount of time to pay the amount due in full. This can be anywhere from 1 day to 90 days, although typically invoice dates are 30 days from the date of the invoice.
During that time, you do not receive any cash, although your business activities must continue. And while most businesses pay within 30 days, others are chronically late. How can you keep cash in your business while you wait for invoice payments?
Invoice factoring is when a third-party business pays you a portion of an invoice balance, then makes the collection efforts on the invoice. The factoring company then pays you the balance of the invoice, less their fee.
Pros of Invoice Factoring
Invoice factoring has many advantages, such as:
- Keeps cash in your business the moment an invoice is created
- Can help inject a portion of cash at needed times
- Saves time from collecting on outstanding invoices
- Low fees – most invoice factoring groups charge reasonable fees for their services
- Not a loan – invoice factoring groups pay you the arranged up-front percentage, which is up to 90% guaranteed. If the company does not collect on an invoice, they do not owe you the balance, nor are you required to pay the advance back.
Cons of Invoice Factoring
While there can be good benefits of invoice factoring, there are also negatives. Here are a few you might want to consider:
You do not receive full invoice amounts. – Although you get cash upfront for your invoices, the fees charged by factoring companies reduces your total revenue amount.
Poor customer service by the factoring company. – Many businesses are concerned about losing customers and damaging relationships due to factoring collections. However, most invoice factoring lenders will work with you to assure that their efforts match the needs of your business.
If you are interested in this type of cash flow help, research potential factoring companies, and find the right facility that can help your business meet its financial needs.