When Accounts Receivable Factoring Is A Better Idea For Short Term Cash Flow

When you’re in business, cash flow makes the world go round. It’s how you pay bills, buy stock and make money. It’s how you stay afloat and grow. Without cash flow, businesses can’t survive. 

In fact, poor cash flow is a leading reason for businesses failing. 82% of businesses that go under do so because of cash flow issues. 

There are a few common interventions that business owners can use to boost their cash flow. Borrowing is perhaps the most common, but what type of borrowing should you get?

There are more options than you may realise. 

Accounts receivable factoring is lesser known than more conventional business borrowing, but it can be cheaper, more flexible and much easier to get.

TL;DR

Accounts receivable factoring is an excellent short term cash flow tool that’s cheaper and more flexible than other common options. By leveraging invoices through a factoring service, businesses can improve their cash flow without getting into long term debt.

What is accounts receivable factoring?

Accounts receivable factoring – or financing – is borrowing that’s based on your invoices. It can take weeks, or even months, for customers to pay invoices, and businesses need to be able to cover overheads in that time.

Read more: Understanding invoice finance

The lender is known as the factor, and borrowing is secured against invoices rather than assets. By factoring accounts receivable, you effectively get an advance on money that’s owed to you already. 

Factoring receivables has the significant advantage of not having to get into significant debt if you don’t need to.

Understanding how accounts receivable financing works

Accounts receivable financing works by effectively ensuring you get invoices paid straight away. When the customer pays the invoice, you repay the borrowing to the factor, plus a small fee.

Business invoice terms commonly require customers to pay invoices in 30 days. Wages – which tend to be a business’ biggest expense – are due every two weeks, and there’s also things like rent, utility bills and inventory to pay for. 

Read more: Important things to know about invoice lending

If customers don’t pay invoices until they’re due, that means businesses need to be able to cover running costs out of their own cash reserves. In small businesses that run on tight margins, this often puts financial pressure on other areas.

If you get hit with another expense in that time, or if the customer doesn’t pay the invoice on time, that pressure ramps up all the more. Even if you can pay your operating expenses from your own bank balance, it may not leave much left over.

Factoring receivables doesn’t impact your revenue, but it brings your payday forward to relieve you of that financial pressure and allow your business to continue to run and grow.

Using accounts receivable factoring for short term cash flow

There are a few features of invoice factoring that make it more attractive and user friendly than traditional business lending. 

• Time. Getting business lending takes time to arrange and actually receive. Businesses have to satisfy in-depth credit checks and provide significant paperwork, and it can take weeks to transfer the borrowing. 

When factoring accounts receivable, you can often get the money into your account within 24 hours. FundTap can even help businesses to get paid the same day you apply. Many business owners are already time poor, so this is not only more convenient, but it allows you to concentrate on other priorities.

• Cost. Traditional lenders see short term cash flow loans as risky, because they’re not secured against business assets. This risk means they come with high interest rates – often upwards of 30%. Not only that, but they have set up fees and regular account fees that make it an expensive form of borrowing.

Setting up an account with FundTap is free and paperless, and invoice factoring rates start from just 4% of the value of the invoice.

• Flexibility. Conventional business borrowing is extremely rigid. There’s often a set minimum amount businesses have to borrow, and it obligates businesses to repay a fixed amount at predetermined periods until the balance is repaid.

When you factor accounts receivable with FundTap, business owners can select which invoices you want financed, allowing you to minimise the cost and borrow only what you need, when you need it. Other factoring services require businesses to use them for all invoices, which ultimately costs more. 

• Ease. As a small business owner, often getting any form of bank loan is hard. There are strict requirements lenders have to satisfy in order to offer credit, and you simply may not be able to get a loan. 

It’s much easier to get invoice financing. You can set up an account with FundTap in just five minutes, and be approved for borrowing within an hour. 

When accounts receivable factoring is a good idea for short term cash flow

Accounts receivable factoring companies like FundTap have been specifically developed to make it faster, easier and cheaper for businesses to improve their cash flow.

There are a range of common business types and situations where factoring accounts receivable is a good idea. 

Service providers

Professional services businesses typically utilise their skills, knowledge and expertise to make money. They often don’t have significant assets or inventory to secure loans against, which makes it difficult to satisfy credit checks for conventional borrowing.

Invoice finance services aren’t concerned with assets – borrowing is secured against invoices. This makes it much better suited to service businesses that use invoices to realise income. 

COD-only sales

Businesses that require customers to pay cash on delivery (COD) may be able to attract more customers or sell more to existing ones by offering more flexible and delayed payment options. Rather than requiring cash on delivery, businesses can invoice customers and use invoice factoring to mitigate cash flow concerns. 

The potential to increase sales may also offset the additional cost of using invoice finance. 

Incongruent payment terms

While many businesses require invoices to be paid within 30 days (net-30), in some industries it’s not unusual to have net-60 or even net-90 day payment terms. If these businesses are bound to shorter payment terms from other suppliers, that can put financial pressure on operations.

Factoring receivables helps to cover imbalances between the timing of paying expenses and realising income. 

Seasonality

Businesses that employ collections staff to chase invoices often don’t fully utilise these functions because they’re just not needed all the time. 

Rather than locking yourself into ongoing employment contracts to have staff permanently chasing invoices, factoring accounts receivables allows you to relieve yourself of the financial pressure of unpaid invoices and outsource collections only when it’s needed.

High growth

Fast-growing businesses often need to invest back into their operations in order to go to the next level. By leveraging borrowing against invoices, these businesses can purchase equipment or inventory, hire staff or make other growth investments without taking on more expensive long term borrowing.

Credit risk

Small businesses or startups regularly find traditional lending requirements hard to satisfy. As well as not having the assets to secure borrowing against, they may be cash flow negative in the early stages of their operations. 

Factoring receivables companies are still able to lend in these instances, because they’re concerned with future income through invoices. 

Low-quality receivables

One of the realities of extending credit to customers is that some won’t pay invoices on time. 

When you use FundTap, you’ll still have to chase these customers for payment, but you’ll at least get the cash flow you need to cover your costs during that time. This drastically reduces the biggest pain point of late invoice payments, which is the impact on business cash flow.

Use Fundtap for efficient short term cash flow

Now you can see the benefits of using accounts receivable factoring ahead of conventional borrowing. However, not all factoring receivables companies are the same.

One key way FundTap is different from the others is through its flexibility. Businesses have the freedom to use FundTap only when it’s needed for no penalty, which helps to keep the costs down. 

Other factoring companies purchase invoices outright, which creates two issues:

• Businesses need to contact customers to change the bank account they pay invoices into. As well as being extra work, this also involves alerting them to the fact you’re using receivables factoring.
• Factors take on responsibility for chasing late invoice payments. They’re the ones who communicate with customers on your behalf, which means you lose an element of control over your customer management and relationship. 

Find out more about how FundTap is more flexible, easier and cheaper than other accounts receivable factoring companies, or check out a free demo to see how it works today.