A primary challenge of running any business, whether you are just starting out, growing, or simply keeping up with daily responsibilities, is that of consistent cash flow. Balancing your accounts receivable with on time customer payment is not always as successful as you would like it to be.
I enjoyed catching up with Aaron Zahedani, Senior Vice President, and Underwriter for Bay View Funding, once again to learn about a financial solution that gives you credit for the existing accounts receivable you have outstanding. We are talking about invoice factoring. I wanted to discover why many companies choose invoice factoring, a valuable alternative lending source.
Aaron filled me in with some of the most important reasons:
- To improve working capital, and increase cash flow, which in turn helps the business meet immediate financial obligations and growth opportunities.
- Improve payment turnaround on invoices.
- Leverage a professional accounts receivable management service.
- Determine the creditworthiness of new customers, and whether customers should be extended credit or not.
- When the bank says no to increasing a credit limit or approving one in the first place.
Taking the creditworthiness worry away is a huge benefit for many small businesses whose management team is frequently wearing many hats. Removing the marketing hat and wearing the credit hat can be a challenge when working with a new customer. A factor can serve as a buffer for the business so it can focus on growing sales and developing new customer relationships from the marketing side, and let the factor take care of the back office credit decisions.
A factor can also take the responsibility of collecting payments for sales that have been generated, delivered and invoiced, as well as provide a perspective on how the small business can grow in a managed way. A huge benefit here is that the factor is not actually taking on a controlling role in how the business is managed. Aaron pointed out that many people think a factoring company wants to run the business, but the reverse is actually true! The focus is in a supportive role, managing credit and collections for the invoices the company has chosen to factor.
I asked a bit more about how many invoices are needed to qualify for factoring, and Aaron explained that different factors have different requirements. ‘Small ticket’ factors can buy invoices for as little as a few hundred dollars, while some factors are more focused on seasoned businesses that have several hundred thousand dollars in invoices that are outstanding. It varies, and those focusing on the smaller amounts generally be charging more for their services. Aaron also shared that often very tenured businesses continue to use a form of invoice factoring as it works well in specific environments.
I wanted to understand a little more about process at Bay View Funding:
Clients generate sales to their customers, as goods or services are delivered. Once the invoice is sent, a copy is also sent to Bay View Funding who in turn advances funds against the amount of the invoice generally within 24 hours. This allows working capital requirements to be met on time, thus providing an answer to the cash flow dilemma.
The team at Bay View Funding is available to answer any questions and help get companies started with this useful and effective method of commercial financing.