Invoice factoring benefits medium and large businesses by reducing cash flow crunches and allowing for possible business expansion. One of the most important systems in any business is financing. There are several options for financing which include traditional cash advance options, such as loans, and alternative routes, such as invoice factoring. However, the use of traditional finance or cash advance systems may have challenges. For example, there may be restrictive guidelines that traditional lending entails. The time required to process, mail, and receive invoice payments may negatively affect both a business’ operational efficiency as well as the optimal use of resources.
Factoring may be able to alleviate many of the challenges medium and large businesses currently face, including:
- Growth pains: Without quick invoice returns, the lack of necessary funds make it harder for a company to expand. Invoice factoring gets the necessary funds deposited quicker, so that the business can grow.
- Current lender frustrations: Many medium and large businesses have credit lines open with traditional lenders and are growing increasingly frustrated with the ever-changing terms and restrictive loan covenants (for instance, cash flow-related loan covenants). Once working with an invoice factoring company, a business can decide which invoices it sells to the factor, making factoring another option.
- Liens: Large companies typically have numerous liens. Receiving finances from invoice factoring can ensure that a business’ liens are paid quickly, removing the company’s debts quickly and increasing the business’ creditworthiness.
- Vendor relationships: It is vital that businesses maintain great relationships with their vendors; both parties mutually benefit when they do. Delayed payments from the vendor affect the business’ ability to purchase more and grow their business. Factoring can help reduce the lag between invoice and payment receipt, helping both the vendor and business maintain a win/win relationship.
- Poor AR turnover: A low or declining accounts receivable turnover indicates a collection problem from its customer or client. Receiving payments late could delay cash flow for any business. Invoice factoring takes over the responsibility of collecting payments for you once your invoice is sold to the factoring company.
If a business wants access to capital for bill payment and fund growth with flexibility, then invoice factoring should be a serious consideration. Due to its success, invoice factoring has become widely used by businesses of all sizes to manage financial growth and cash flow.
Invoice factoring can play a key role in streamlining financial practices in the following ways:
- Quick, convenient access to funds: Invoice factoring will purchase invoices between one to two days after approval. In fact, initially setting up can take between 5 to 10 days from receiving the factoring application and related documentation, which may be faster than traditional financing/banking loans.
- Flexible terms: A business can choose which invoices to factor and how often they are factored without the need for long-term contracts.
- Reasonable fees: Having a third party to perform invoice factoring does involve a fee, but the cost may be competitive compared to other financing options. Keep in mind that fees vary according to the sales volume, nature of the business, and the creditworthiness of the businesses’ customers.
- Retain control: Even though a third party performs the invoice factoring, a business will still retain control over which invoices they choose to sell.
- Growth potential: Mature companies may be seeking to reposition to a market with a higher potential for growth. Invoice factoring can allow for that expansion.
By having access to funds without increasing debt, invoice factoring is a practical strategy for businesses who not only want to ensure bill payments, but also to meet payroll, maintain good credit, and enjoy growth while mitigating risk. If you want to know how to incorporate invoice factoring into the corporate financial model for your medium or large-sized business, contact Bay View Funding today.