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Companies facing financial difficulties are often desperate. In order to save the business, they often turn to any means necessary — loans, credit cards, structural changes, even bankruptcy. Factoring is another method for accessing quick cash is effective, but because so many struggling companies have used invoice factoring to get back on solid ground, it’s developed a reputation in some circles as something that only those businesses on the brink of collapse would even consider.
That fact, though, is that factoring can benefit all businesses — not just those that are experiencing cash flow issues. And truth be told, factoring can actually benefit companies that are doing well and experiencing significant growth even more than those that are in dire straits. While there are costs associated with factoring, the benefits to a thriving business are likely to far outweigh them.
So if factoring isn’t just for troubled companies, what are the circumstances where business owners should consider it?
Your Customers Are Slow to Pay
If you run a retail shop where most of your transactions are cash or credit, you might never consider factoring. But if you bill your customers, and they have anywhere from 30 to 90 days to pay, you might find that factoring companies are just what you need to stay afloat. As we all know, just because an invoice is due for payment in 45 days, that doesn’t mean that customers will actually pay in 45 days. Not to mention, those payment terms mean that you have a collection on your books for up to six weeks or longer.
If one customer is slow to pay, it might not have too much of an impact on your cash flow. But if all of your customers take their time to pay, well, things could get tight. By factoring invoices, you receive as much as 70 to 90 percent of the payment upfront, without having to wait for the customer to pay, which can improve your cash flow and allow you to pay your bills.
You’re a New Company and Want to Grow
Most banks are reluctant to lend money to startups, which most define as companies that are less than two years old. Without several solid years of established credit history, steady income, and adequate assets or collateral, it’s likely that your business loan application will be turned down. Not to mention, many business loans have high minimums that could result in higher debt than a small business can or should take on, and come with annual interest rates that, depending on the loan amount and how long you take to repay the loan, could increase the amount you actually pay considerably.
When combined with the length that it often takes to qualify for an receive a loan, and the restrictions that banks put on how you can use the funds you receive, it’s easy to see why a traditional business loan isn’t always the most attractive option for a new business. By using invoice factoring, a startup that wants to grow can access money quickly, often for a lower cost, and use it however it sees fit, whether to purchase new inventory or equipment, open a new location, or just get caught up on outstanding bills.
You Have Trouble Managing Accounts Receivable
Most small-business owners wear many hats. With so many responsibilities, keeping track of invoices, collecting from slow or non-paying customers, and monitoring customer payment histories can sometimes land on the back burner. The best factoring companies help their clients keep better track of customers and invoices, by providing regular reports about which invoices have been paid and when, monitoring customer creditworthiness, and helping businesses identify patterns or issues that could be affecting their bottom line. In short, your factoring provider becomes a partner in your business, one who helps you increase profits and helps your business grow.
Invoice factoring can be a lifesaver for companies that are facing cash flow issues or struggling to recover from a disaster or emergency. But even companies that are doing well can benefit from the faster access to cash, account management assistance, and growth opportunities that factoring provides. If you are looking for ways to help your business grow and move forward, don’t automatically dismiss factoring as an option.