Why Small Businesses Make Use Of Factoring

Borrowing plays an important role in allowing small businesses to grow. It helps you to grow your capacity, reach new markets and purchase equipment.

There are a range of business finance options available today, including one you may not have heard so much of – invoice factoring.

TL; DR

Invoice factoring is a great short term finance option to boost business cash flow. You can set up a free account with

FundTap and have finance available to get money into your account within hours. It’s much quicker and easier to get than other forms of business finance.

Various business finance options

The classic bank loan is probably something you’ll be familiar with already. However, loans can be hard for small businesses to get – you’ll need a demonstrated credit history and valuable assets to secure lending against.

You can also get a credit line for businesses, crowdfunding or investment capital.

Then there’s invoice factoring, also known as invoice financing. It’s something that works on its own or alongside other finance options to reduce the cost of borrowing and give small businesses much-needed flexibility.

What is factoring?

Small business invoice factoring is lending that’s based on your invoices. A specialist invoice lender finances the value of an outstanding invoice, and the borrowing is repaid when the customer pays their account.

Factoring helps businesses with cash flow during the time between completing a piece of work and waiting for the client to pay for it. The finance can be used to pay operating expenses, purchase stock or grow the business.

Small business factoring is short term lending with long term benefit – FundTap customers have used invoice factoring to increase their turnover by 54% in the last two years.

How does factoring work?

Small business factoring with FundTap has been designed with small business owners in mind – it’s quick, easy, flexible and affordable.

Setting up an account takes just five minutes, and once it’s done you can submit an invoice for financing whenever you need it.

FundTap differs from other factoring services by not charging regular account or admin fees, so it costs nothing until you actually need to borrow money. This makes factoring a flexible and affordable form of cash flow finance for a rainy day.

FundTap integrates into online software like MYOB and Xero so financing an invoice is as simple as selecting it and submitting it. You can have the funds in your account the same day. Then, when clients pay their invoices, the lending is automatically debited back to FundTap.

Small businesses commonly use factoring alongside other forms of borrowing. Business often goes through ups and downs, and rather than borrowing a large bulk amount to get through a quiet period, you can factor your invoices to reduce the size of the bank loan you need.

Benefits of factoring

The speed, ease and flexibility of small business invoice factoring can be seen in a number of ways:

Positive cash flow

Small businesses often run on fine margins, and cash flow is often an issue – particularly when you’re waiting for clients to pay an invoice. Improving small business cash flow is a significant benefit.

Get cash fast

Getting finance takes time. Bank loans have thorough credit check processes they have to go through, and credit lines, overdrafts and other forms of lending generally take weeks to get approved.

Compared to other forms of small business finance, factoring is infinitely faster. It takes just five minutes to set up a

FundTap account, you can be approved for borrowing the same day, and receive funding within hours of submitting an invoice.

This is particularly useful as when small businesses need finance, they often need it fast.

Better financial planning

Invoice factoring is a great safety net for business cash flow. When it’s an option for your business, you can plan ahead with confidence, knowing you have an effective tool for navigating those quieter periods.

Many clients don’t pay invoices on time, which throws in an added layer of unpredictability. Invoice financing replicates the effect of invoice payment, providing cash flow that takes the pressure off these situations.

Read more: How to have late payment conversations with clients

Have more knowledge about your customers

When invoicing clients and offering terms of trade, it can sometimes be beneficial to undertake a credit check on them. When you invoice customers, you essentially extend them a form of credit because you do the work before you’re paid.

Getting a credit check done gives you the confidence to know they can pay their bills.

Avoid bad debts

Other invoice factoring providers take on responsibility for getting invoices paid, which means you don’t have to worry about bad debts.

However, this means a third party will be communicating with your clients about your invoices, which can impact your relationship with them.

Reasons why small businesses use factoring

Let’s apply these benefits to real life situations. Small business factoring is fast becoming a popular option among companies looking to solve a range of issues:

Improve cash flow from slow-paying clients

Every business that invoices clients knows the frustration when invoices aren’t paid on time. However, it’s more than just an inconvenience – you have bills to pay and overheads to cover.

Many small businesses don’t carry large amounts of cash, so when customers don’t pay invoices it can put cash flow pressure on.

Invoice factoring doesn’t make clients pay invoices faster, but it takes the cash flow pain out of these common situations.

Great solution for new companies, small companies, or startups

New and small companies need finance to grow, and invoice factoring is one of the most accessible forms of finance.

You may not qualify for a bank loan, or may not want to carry long term debt. Invoice financing helps to cover the costs of growth to pay bills and purchase stock or assets that increase your capacity.

Aids in turnaround situations

If your business is going through a tough patch, many lenders won’t go near you. However, because invoice factoring is based on your clients’ ability to pay bills, you can still get it when things are quiet.

Read more: Common invoicing mistakes to avoid

Invoice factoring also provides smaller levels of finance that means you don’t get into unmanageable levels of debt. If you’re going through a turnaround period, it offers help while also reducing the risk of making things even worse.

Helps those unable to qualify for a loan/line of credit

As we’ve alluded to above, banks have strict requirements that need to be satisfied in order to lend money.
It’s been said that to qualify for a bank loan, first you have to prove you don’t need it. Often, small businesses and startups simply don’t qualify.

However, invoices are considered a much more reliable form of security to borrow against, so invoice factoring is available for businesses that aren’t able to get a loan from the bank.

Less-than-perfect credit

Even if your business can satisfy bank credit checks, as the owner, your personal finances will also be assessed. You’ll likely be the guarantor for the loan, and if your own credit score isn’t up to scratch, the bank may not lend you the money.

Again, invoice factoring is borrowing that’s based on your clients. Your own financial situation isn’t as relevant to the credit checking process – which is part of the reason finance can be approved so much faster.

Take home message

Growing a new business isn’t a linear process – you will go through ups and downs as you work towards achieving your goals. Having a form of finance available to help fuel the ups and keep you going through the downs makes a significant difference to your chances of success.

Read more: Small business tips

When you have invoice factoring with FundTap set up, you can use it when you need to. If you don’t, it won’t cost you anything – there’s no obligation and no fees for just having an account.

Most invoice factoring services require users to finance all of their invoices, which raises the cost and minimises the benefit you get. After a while, it essentially just brings forward all of your pay days, which doesn’t actually benefit you.

Find out more about how FundTap helps to grow small businesses, or check out a free demo to see it for yourself today.