Using Factoring for Cash Flow

It’s not uncommon for businesses to face cash flow problems. Unfortunately, not every business owner can qualify for a traditional business loan. If you’re dealing with cash flow issues and have customers that are slow to pay their invoices, factoring can provide a solution.

What Is It?

Factoring (or invoice factoring) offers an alternative to traditional business loans. You submit your invoices to the company (or factor) and receive 70% to 90% (depending upon the company) of the total value, giving you the working capital that you need to run your business. Once the invoices are paid, you get the remainder of the balance minus the fees.

Why Use It for Cash Flow?

There are several benefits to using factoring. One of the biggest is that you receive money quickly. Rather than waiting for 30 to 60 days (or more), you can typically receive funds within 24 to 48 hours.

The funds that you receive help you to alleviate your cash flow issues. You can use the money that you receive any way that you see fit to run or grow your business.

Invoice factoring isn’t a traditional loan. You don’t have to pay anything back. Instead, you sell your invoices to the company. Your customers then pay the company rather than you. The only thing that you pay is a fee for the service, which is taken out of the remainder that you get after the invoices are paid by the customers. Not only do you get working capital almost immediately, but you don’t have to deal with sending out reminders or dealing with slow-paying customers.

Things to Keep in Mind

While there are several benefits associated with this alternative financing method, there are a few things that you need to keep in mind. First, selling your invoices to a factor can be rather expensive. You typically pay several percentage points more than what you would with a traditional loan.

Another thing that you should keep in mind is that this solution isn’t for everyone. If you typically send out small denomination invoices, the service may not be the most economical choice. The factor may charge fees for assessing the risk of each invoice, which can quickly add up if you sell several.

You shouldn’t have to let slow-paying customers and cash flow issues keep you from running and growing your business. If you need a fast solution (or can’t qualify for a business loan) this option may be worth considering.

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