Invoice Factoring + Small Business = Success
If the goal is to grow your small business, you need working capital. While growth can, and should, lead to larger profits, it also leads to increased overhead expenses. Although a bank loan or line of credit may help to cover these escalating costs, banks are often unwilling to fully meet a small business’s working capital needs…and that’s where invoice factoring companies can help. According to an article in The Huffington Post, written by Daniel DeMeo:
“One trend that has coincided with sunnier days for local businesses is the rise of alternative finance companies. Growth, after all, often brings about the need for working capital…On Main Street, more than a few local businesses may be finding that alternative finance companies, with their flexibility and emphasis on speed, could be just what they need.”
Invoice factoring, one of the more common alternative financing methods, has been used by small and medium-sized businesses for years to help expand their operations. By selling receivables, a business can generate immediate working capital to be used for virtually any commercial purpose. Better yet, factoring companies are not concerned with a business’s credit history or time in operation. As long as revenue is being generated, most small businesses can quickly qualify for accounts receivable factoring. Following are some of the ways in which this alternative form of working capital helps companies to grow.
Invoice Factoring = Accepting Larger Contracts
When Acme Manufacturing wants to grow by accepting larger orders, it also must consider the increased overhead that is associated with this expansion. While Acme’s customers will likely not pay for at least 30 days from the time the work is completed, Acme still has additional work orders that need to be financed. This creates an obvious cash flow dilemma that can put Acme’s operations on hold until payment is received.
Fortunately, Acme is able to submit its receivable to an invoice factoring company and receive an advance payment on the invoice within 24 hours or less. This amount is typically between 80-90% of the gross receivable value. The factor then waits the 30+ days for the customer to pay. As soon as the customer remits payment to the factor, Acme is reimbursed the remaining 10-20% less a small factoring fee. This rapid access to working capital allows Acme to fulfill additional orders without having to wait for their “other” customer to pay the invoice. Even better, Acme is able to repeat this process with all of their receivables, allowing for virtually unlimited growth.
Factoring Companies = Payroll Funding Assistance
Another headache that accompanies business expansion is the need to cover payroll. As a company expands, there is an obvious need to hire more staff, but these employees are typically paid every couple of weeks. So, what happens when invoices are paid on 30-45 day terms, but employees are paid every 14 days? Payroll funding is one of the most common forms of assistance that invoice factoring offers. By selling its receivables to a small business funding company, a growing business generates immediate cash flow to pay employees. In addition to covering payroll, many businesses will find receivables financing beneficial to help cover payroll taxes when they’re in a bind. If a business owner suddenly realizes that payroll taxes are due, but his capital is largely tied up in pending receivables, the funds provided by factoring can help alleviate the payroll tax burden. This is the type of flexibility many small and medium-sized business owners do not find with traditional bank loans. When a situation arises where working capital becomes an immediate need, banks will still take weeks to approve a loan application whereas an invoice factoring company can provide cash within a matter of hours.
Receivables Financing = Back Office Support
As a small business grows, it will inevitably find itself in need of additional administrative support staff. These are generally non-revenue generating positions, but are vital to maintain the daily operations of the company. Something that is often overlooked with invoice factoring companies is that they can help fill some of these positions…free of charge. Factors always provide collections assistance on behalf of their clients. The ability to collect payment in a timely manner is certainly an important task for any business that wants to thrive and grow. However, many business owners will try to handle the collections process on their own in lieu of spending money on a designated employee. Or, they’ll assign the task to another staff member who is already busy with other work. Regardless of the circumstances, the role of collections often becomes overlooked (especially as the business grows) and can lead to cash flow problems. Reputable funding firms will have dedicated collections teams to handle this job on behalf of all their clients.
Another vital resource that funding sources provide is credit evaluation. When a small business is interested in taking on a new customer account, one of the most important items to consider is whether that customer pays their bills. Factors utilize several business credit databases to help their client make the decision on whether or not to move forward with the new customer. The simple act of utilizing credit data can make the difference between success and complete failure for any small business.
Final Thoughts
Companies of all sizes have used invoice factoring companies for decades to help cover operating expenses, make payroll, and manage back office operations. If you own a small business and are focusing on growth, or have problems obtaining a bank loan, contact us today for a discussion surrounding your working capital needs. Our specialists have worked with hundreds of companies in these similar situations and are prepared to help find the perfect financial product to meet your needs.