Cash flow is necessary for you to run your business smoothly. You need to have access to the funds that will run your business in an easy, efficient, and timely manner. If your clients are taking too long to pay their account, your business will encounter countless issues.
You may not be able to pay your employees, your fixed costs, or make necessary investments in your business. Simply put, good cash flow allows your business to run smoothly.
Invoice factoring makes sense for businesses experiencing slow payments from customers and they need cash to cover expenses. It can also be a good choice for businesses that are just starting out, since traditional financing may be difficult to access.
What is Invoice Factoring
Invoice factoring is the practice of selling your invoices to a third party, who will then immediately give you the majority of the invoice, and then collect payment from your client. When they collect, they will then pay you the remainder of the balance and subtract a small fee.
Invoicing companies exist to give you access to the funds you invoice for instantaneously. Having the lump sum from the invoice immediately can allow your company to pay needed expenses and operate with greater financial flexibility. Some of the industry leaders will be able to give you the funds immediately, 24/7.
The Best Invoice Factoring Companies
Deciding which factoring company to work with can be a difficult decision. The companies vary in the percentage of the invoice they provide up front, what fee they take, and when they can deliver payment. Here’s a breakdown of the most attractive factoring companies.
Difference Between Recourse and Non-Recourse Funding
One of the most important things to think about when deciding which factoring company to work with is determining if they offer resource or non-recourse factoring.
Imagine a situation where you give an invoice of yours to your factoring company, collect the lump sum payment, and go about running your business. Later, the company you invoiced goes out of business and cannot pay the invoice. Who is responsible for that debt?
If your factoring company is non-recourse, then you will not be responsible. You will get to keep the lump sum, and the rest of the invoice will be paid to you whenever the factoring company is able to track down the debt. However, if your factoring company is a recourse invoice factoring company, you will be responsible for the debt. Before working with any factoring company, carefully read their factoring agreement.
Consider What Lines of Credit are Available to You
If your business has a good credit score, it may make sense for you to consider a loan. Many banks offer attractive loans to small businesses, especially when there are favorable macroeconomic conditions.
If the economy is strong, and the Fed has maintained low interest rates, you may want to consider taking out a loan. This can be a short term boost to your cashflow, allowing you to make investments to grow your business.
Of course, loans are not a permanent cash flow solution. They don’t structurally change your business. This means you should not consider them a long term solution to cash flow problems.
Offer Incentives for Up Front Payment
If you can offer discounts or some other incentive for up front payment, that may be something worth considering. It could be incredibly beneficial to your business. Increasing the amount of payment upfront is a worthwhile solution to cashflow problems, and can make sense in a lot of industries.
If there is an exciting non financial incentive you can offer, such as some sort of perk, which is easy for your business to deliver, consider implementing it. If this is commonplace in your industry, or you think would be reasonable with your customer base, consider implementing it. Up front payment is the best cash flow issue mitigator, and anything to increase it is worth thinking about.
One of the best, and simplest, ways to improve your cash flow is to minimize unnecessary expenses. Many businesses can be plagued by recurring expenses which restrict their ability to effectively function. Many of these expenses can be cut.
A simple, yet exhaustive audit of your businesses monthly expenses can go a long way to reducing unnecessary spending. If your business buys wholesale products, examine how much product you waste at the end of each day or week. Could you get away with purchasing less product?
Cash Flow is critical for all businesses, and if your business is struggling, these are some of the steps you should consider.