What is invoice factoring and how does it work?
Behind a successful business is good cash flow. However, this may not always be the case, especially if a business has many outstanding invoices. Invoices are normally payable in 30, 60, or 90-day terms. Sometimes even longer. These long waiting periods can disrupt a business’s cash flow, which, in turn, affects the business’ performance.
This is where invoice factoring comes in. Invoice factoring is the process of selling a business’s unpaid invoices to a factoring company (also known as the “factor”). In the process of selling a product or providing a service to a customer, a business issues an invoice. These invoices represent the amount payable by customers to the business. Instead of waiting for the invoice to mature and collecting the amount from the customer, the business sells the invoice to a factoring company. Once a business has sold its invoices to the factor, the latter sends a notice to the customer to inform them that all payments should now be directed to them.
A percentage of the invoice is paid by the factoring company as an upfront payment. Once the customer has paid the invoice, the factor releases the remaining amount and retains a small portion, which serves as their “fee” for advancing the amount and assuming the risk.
Invoice factoring can be a good alternative for small businesses or businesses that are just starting due to lower risk and lack of required collateral. Moreover, it does not have an impact on a business’ credit standing. This gives businesses the jump start that they need in terms of funds.
Why having a healthy cash flow is important for businesses.
Funds are the lifeblood of any business; therefore, a good cash flow is crucial to ensure the business’ healthy finances. A healthy cash flow gives a business the capacity to better manage its present and future financial goals, as well as meet its current financial responsibilities, making the business more robust and profitable. Moreover, having a healthy cash flow means having enough working capital that the business can use. Here are a few tips to help businesses ensure that they have enough working capital for the whole year:
- Always anticipate your business’ expenses as well as the profit. While it can be difficult to have actual figures, estimates can be made from financial models.
- Be on the lookout for seasonal changes in the cash flow. Seasonal changes may mean you need to hire additional employees, purchase new equipment, or have a change in supply and demand. Maintaining a healthy cash flow can help you be prepared for these changes.
- Improve budget monitoring. It is easy to get lax in terms of expenditures, and this oftentimes leads to overspending. Being more vigilant in terms of budget monitoring will greatly help to ensure that you have enough working capital and at the same time, good cash flow.
How can invoice factoring improve cash flow?
Businesses should be proactive. They should not stand idly by and just wait for customers to pay off their invoice dues. Invoice factoring is one of the many ways that businesses can do this. Here are the ways invoice factoring can help improve the cash flow:
The business is no longer dependent on a customer’s payments since the invoices have been sold to the factoring company. As such, they need not wait for the invoice to mature since the factoring company will pay the business upfront and at the same time, assume the risk of collecting the amount due in the invoice during maturity.
Access to more working capital
Once the invoice “sale” is concluded, the factoring company will pay for the invoices. The amount that the business receives can serve as additional working capital to further improve the enterprise.
Improving business cash flow
Cash flow pertains to the money that flows in and out of the business. When you say invoice factoring is used to improve cash flow, it only means that by using the proceeds of the sale of the invoice productively, the business can optimize its business potential by taking in more customers or even consider a business expansion.
Invoice factoring with CapFlow Funding
We have discussed what invoice factoring is, how it works, and how it helps in a business’s cash flow. If you have a business, this is worth your consideration. At CapFlow Funding, we treat our clients’ businesses as our own. We have many different options for your funding needs and can help you decide what is most beneficial for your needs.