invoice factoring
One of the challenges of conventional financing is that it is not always very dynamic. Although conventional business financing can be a great tool to buy an asset, such as machinery or office space, it doesn’t always work well when used to cover operating expenses. The reason is that most business loans and lines of credit have a fixed maximum that you can’t exceed. However, most operating expenses have a large variable cost component, and are directly tied to your sales. Basically, they increase with your sales because they are incurred when servicing those new sales. Seen in a different light, a sales opportunity could be so large that it would exceed your fixed financing capabilities. Your only options would be to find more financing, or drop the sale.
Now, what would happen if your company’s financing was dynamic and directly tied to your sales? Consider the opportunities that you would pursue if you knew that you would be able to meet all operating expenses associated with it. One way to bridge this financial challenge is to consider factoring invoices.
One of the biggest reasons why most businesses have cash flow problems is that they must sell their products on 30 day terms. That means that they must wait 30 to 60 days to get paid. Offering terms a very common practice in business-to-business and government sales. However, few businesses can really afford to offer them since they don’t have the necessary cash cushion to do so. This is where invoice factoring can play an important role.
Factoring provides your company with a substantial advance on your invoices, usually about 80%. This enables you to cover important operating expenses, such as rent and payroll, while you wait to get paid. The transaction with the factoring company is settled once the client pays the invoice in full. So the value proposition is as follows: you get 80% within one or two business days of invoicing, which enables you to meet business expenses. You then get the remaining 20%, less a small fee, once the invoice is actually paid.
One of the most important advantages of accounts receivable factoring is that the main requirement to qualify, is to do business with reliable and credit worthy clients. Aside from that, the business needs to be well run and free of legal or taxation issues. This makes factoring companies accessible to startups and businesses that don’t have substantial physical assets, but who do business with a solid customer base.
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