Is your Business starved of capital?
Running a business has its challenges and cash flow problem is one of them. That's why web sites where you can buy car insurance with monthly payments and low deposits are so successful! Even with an enterprise that rakes in significant profits, sometimes it can be difficult to put together the necessary cash needed for operations. There are various solutions to consider when dealing with cash flow problems, such as invoice factoring. Companies use invoice factoring by selling their invoices (account receivables) to stabilise cash flow. Essentially, an invoice is converted into capital. Note that factoring your invoices does not pass as a loan. An invoice means that you have not received payment yet from your customers since it is just a promise. What you do is sell that promise to a factoring company at a discount rate.
How it Works
Invoice factoring applies to enterprises that conduct business with other companies (BSB) or with a government (B2G). If your entity deals with consumer invoices, then this option is not suitable. Invoice factoring offers an advantage when you are in need of a short-term loan. Business operations can shift instantly and even when you thought there were sufficient contingencies, you find yourself in need of a loan. Take this example; your company provides internet service to another company, and the invoice is £ 15,000 due in 30 days. However, payday approaches and you realise there is a shortage of cash. So, you go to a factoring company to sell the £15,000 invoice. The discount is maybe 4%, so that is a fee of £600. Upon evaluation, the factoring company agrees to advance 80% and that means you get £11,520. Then the rest is paid out once the invoice clears. With the advance, you can cover the shortage and pay your salaries without a problem.
Why use it
One question that comes up is; why pick invoice factoring over traditional loans? One is the processing speed of invoice factoring. It will take you about 3-4 days if you qualify to get the cash you need. With a traditional bank loan, you would have to wait even months before approval. The need for collateral when applying for conventional loans is another one. You would need to present an asset such as real estate for a traditional lending institution to consider approving a loan. Other eligibility requirements such as an exemplary credit history and a solid operating history will apply. A factoring company will evaluate the creditworthiness of your clients and the value of the invoices. The application process is incredibly facile, and some electronic options make things even less taxing.
The other plus point that businesses get is line flexibility. When using invoice factoring to access quick cash, the size of the revenue will dictate the credit line. It is possible to adapt and adjust the line depending on your company’s value and needs. You only have to know the qualifications to meet like not having tax or legal problems.
Invoice factoring is only suitable in selected instances. You can only capitalise in cases of slow paying clients. If there is a need for capital to expand a business, then other funding means would be more suitable. Another downside is that the credit history of your customer can be the reason you fail to qualify for invoice factoring. As stated, invoice factoring companies only work with specific businesses.