Invoice Factoring for quick cash
Any small business owner knows that cash flow is king. Between insurance, payroll, loans, company credit cards, repairs and taxes, someone or something needs to be paid almost every day. If you extend credit to your customers, you may not receive payment for goods and services until 30 to 60 days have passed, and that situation can easily lead to a classic cash flow crisis.
Although bank loans may be your first choice to solve the problem, they're hard to get. If you have credit card lines available, you can access those, and if that fails, you can ask relatives for money. Eventually, however, you may wish to consider factoring, which is a system where a lender will actually buy your outstanding invoices for cash. While many business people consider this a short-term solution only, those who look to the future know that factoring can actually help a business grow and prosper.
An invoice factoring company will make you an offer to purchase your outstanding invoices. Of course, your customers must be credit-worthy and your invoices cannot be aged beyond a certain date.
If, for example, you sell $2000 of auto parts to a local garage with 30 day terms, your factoring company will pay you 80 to 90 percent of the value of the invoice. That means that you could receive $1600 to $1800 very quickly--sometimes within 24 hours. Your customer is notified that the factor now owns the invoice, and they're instructed to pay within the credit terms you've allowed. When the factor receives the balance, you’ll get the rest of your money, minus a small service charge.
The Smart Money
It's true that some business owners will only turn to factoring in a crisis, but forward-thinking entrepreneurs learn to make good use of the instant cash flow. Business 101 professors will tell you that one of the most basic rules of business is that you must do everything possible to hold onto cash. If you try to stretch the payment of invoices as far out as you can while you attempt to collect any money due you as soon as possible, free cash is created. You can use that cash to buy supplies at a discount, add equipment or even open another location. Smart owners will carefully examine the cost of factoring and build it into their pricing structure, so that the actual cost of the process will be negligible.
It's true that factoring is a great way to get yourself out of a serious jam, but if you consider the advantages of instant customer payments, you should be able to use factoring as an advantage and not only as a short term fix.