When you’re a small business, cash flow is what keeps you afloat. You have expenses and overheads that you need to pay, and you need money coming in to do it.
But it’s not always as easy as sending out invoices and getting money in the bank. You can forecast your cash flow based on the invoices you send out, but for whatever reason, sometimes invoices just don’t get paid on time. That leaves you having to dip into your own funds to pay bills, or look for money elsewhere.
Around 10% of business invoices are paid late, and businesses typically spend around three weeks per year chasing payment.
This is where having an overview of business financial factoring can help.
Financial factoring is used by businesses to improve their cash flow by getting invoices paid quickly. You may have a client who’s slow to pay invoices, or you may have a big bill to pay urgently…whatever the need, it’s a great way to get money coming in for the work you’ve done.
Also known as business receivable factoring or invoice financing, it works by partnering with a third party (the factor) and having them buy your invoices.
Having an overview on invoice financing means no more waiting around for invoices to be paid, and better cash flow in your business.
Understanding the process of invoice lending is the first step in being able to unlock the advantages that come with it.
It’s actually quite simple. When you invoice a client, they usually have up to a month to pay the invoice. If they don’t pay on time, that’s a long wait to get the money you’re owed.
Accounts receivable such as these are considered business assets, because it’s money you’re owed for work you’ve done. However, until you actually receive that money, it doesn’t actually have any tangible value. With factoring, you’re able to get quick cash by effectively selling a portion of the invoice to your factoring partner.
Factoring rates vary among different organizations. At FundTap, fees start as low as 4% of the invoice value. Many other services also charge account, admin and setup fees.
Other factoring partners essentially take over your invoices, and your customers pay them. With FundTap, your customers pay you as they normally do, and an automated direct debit repays FundTap. This allows you to keep control of the customer relationship. You don’t need to change the accounts on your invoices and you don’t need to worry about a third party chasing up unpaid invoices on your behalf.
With FundTap, you don’t have to use factoring for all your invoices if you don’t want to. Again, if you have one customer who’s often slow to pay invoices, or if you need cash urgently, you can select the invoices you want to get paid in advance. Some factorers require all your invoices, so there isn’t the same degree of flexibility.
Plainly, the big benefit of business receivable factoring is having good cash flow. This allows you to pay bills, invest in equipment or whatever it is that you need the money for.
At the same time, you don’t have the stress of waiting on outstanding invoices so you can pay your own bills. Unpaid bills can impact your credit rating, and it can feel like it’s no fault of your own if you’re waiting on a customer to pay an invoice before you pay such bills.
Bank loans are a common form of business lending, which come with greater obligations. They’re often for larger amounts than your invoices, and the money you receive isn’t yours in the first place. Small business owners may have to secure loans with personal assets such as their homes, which isn’t required for financial factoring.
You also don’t need to satisfy exhaustive bank requirements that are often needed to get a loan. It’s often said that, to get a bank loan, you first have to prove you don’t need one. Many small-medium businesses find it hard to get a loan despite the fact they are financially healthy. At the same time, it takes much more effort to assemble the financial information required by a bank to get a loan.
While there are numerous benefits, there are some risks associated with business factoring too.
Financial factoring does come in a different form to a loan, but it does have some similarities in that the money does need to be repaid. Until the customer pays the invoice, your business essentially owes your factoring partner the money they’ve advanced you.
In the vast majority of instances, this isn’t an issue, but it is something to be aware of. Because you repay the factoring partner when you are paid by your customer, payments are always aligned. You can however get into strife if you don’t repay the factoring partner when you customer pays and is something to watch out for.
It’s also worth pointing out that factoring isn’t free. While it only accounts for a minor portion of your invoice, you are still paying money to get financial factoring.
The advantage of financial factoring is it enables you to get money to spend on whatever you need to. The possibilities are endless.
If your business needs a significant amount of money, such as for an investment, then financial factoring can be used in conjunction with a bank loan.
Having extra cash on hand may make it easier to get a loan, for example. This is especially the case if you’re waiting on a particularly large invoice to be paid.
These are some of the common costs that businesses use financial factoring for:
Investment is often part of growing a business. Expansion takes time and expertise that isn’t cheap. Research and development, product testing, marketing, staffing and go-to-market are just some of the phases that businesses go through in an expansion.
Businesses need good cash flow, or a large financial backing, in order to fund these types of activities.
Many small businesses take out loans to expand their operations, but business receivable factoring can prevent the need for borrowing. Financial factoring can be used on top of a business loan, which reduces the cost of borrowing and allows businesses to manage their lending for periods where they need more cash on hand.
Having good machinery can be a huge cost saver for businesses, particularly when they can automate processes. By removing the need for staff members to do such tasks, businesses can save a lot of money in wages.
The problem is, these types of equipment don’t come cheap. In fact, the more money they enable you to save, the more expensive they probably are. However, being able to purchase these items can be transformational for small businesses.
You should look at asset finance options to purchase individual assets. Factoring can relieve cash flow pressure that comes as you ramp up your business and expand.
Wages are one of the biggest expenses businesses have, but it can be challenging ensuring you always have the cash on hand to pay them. If you’re paying wages every two weeks but invoices are paid every month, you need to have the cash flow to be able to cover these costs. Financial factoring is extremely effective in these times.
Also, it helps to employ more staff and increase profits. Consider a plumbing business for example; it may make $30 an hour in profit on each staff member. If there’s only one plumber and they work eight hours a day, the business makes $240 a day on their labour. Hiring another plumber immediately doubles that business’s profitability.
However, that plumber will need a vehicle and all the right tools in order to join the company. They may also need additional training. Many other types of businesses have onboarding costs such as laptops or phones, and it may take new staff time before they’re profitable to the business.
Financial factoring can help to bridge the gap by accessing the funds needed to bring on new staff.
As a business owner, you know what it’s like dealing with outstanding invoices. You get the frustration of waiting for invoices to be paid, so you don’t want to be the source of annoyance for your own partners who invoice you.
By paying your own invoices or bills on time, you can create positive relationships that benefit your business.
The sooner you can pay off a business loan, the more you can avoid interest charges or late fees, and the cheaper they are.
These are often the first bills business owners look to pay when they receive invoice payments because they end up costing more if you miss the due date. It may even be a prudent approach to seek financial factoring if you’re still waiting for an invoice to be paid close to a loan repayment deadline.
When you send out an invoice to a customer and they pay it immediately, you’re very happy with that. In a perfect world, this would happen all the time.
While that may be unrealistic, financial factoring is the next best thing. It provides businesses with certainty around their cash flow and removes the financial stress that comes with worrying about when outstanding invoices will be paid.
With FundTap, financial factoring is quick, easy and paperless. It integrates with your own invoicing software, so all you have to do is select which invoices you want to be paid. You can get funds in your account in hours, so you can spend your time focusing on the things that are important to your business.