Is Invoice Factoring for Your Small Business?
Your suppliers heavily discount product’s prices (means more profits for you); you need funds to invest in a new equipment; you want to move to a new, better location for your store; you get a large order needing capital to work on; there are some opportunities that are rather time sensitive – if you respond slowly, you’d missed your chance to grow our business – and secure more profits.
You could take out small business loans that come in various forms, actually; this article highlights invoice factoring as an ideal solution for your small business funding needs.
But first things first – what is invoice factoring and what’s the pros and cons of it?
What is invoice factoring?
The idea of invoice factoring is to get most of your account receivables in lump sum quickly – usually within 2 working days – while having a factoring company, such as CBAC Funding, handle your invoice – including the remaining balance. So, instead of you waiting for your customers to pay you, factoring your invoice will relieve some “tasks” you need to do in (anxiously) waiting for your invoices to be paid in full, as well as reminding your clients to pay their invoices.
Here’s an illustration for you:
Suppose your company, ABC, bill XYZ company $100,000. Instead of waiting for XYZ to pay your invoice, you can contact a factoring company to help you “factor” your invoice, giving you, say, $80,000 in lump sum. How about the remaining $20,000? Well, when XYZ is finally paying the invoice, you will get the $20,000 (it’s yours, anyway!), minus a factoring company’s fee, typically 3 percent.
Is invoice factoring for me?
Invoice factoring sounds like a great idea, isn’t it? Well, yes. But just like any other business financing methods, you need to be aware of the pros as well as the cons:
Invoice factoring pros
1. It’s good for your cash flow
“Get cash now, not later” is always a good thing to your business bottom line!
2. You have more room to take opportunities to grow your business
Handling large orders, make use of your suppliers’ discount prices, etc. – we do need to grab opportunities when they are available.
3. Quickly addressing business problems
invoice factoring is not only good for securing opportunities; it is also good for giving you room to breathe when your small business need something urgent, e.g. your bakery store suddenly blown up and you need to buy a new one as soon as possible, simply need cash quickly to pay your staffs’ salaries, etc.
Invoice factoring cons
1. Your receivable period and credit rating affects invoice factoring company fee
It’s only common sense, really. Long invoice terms and your poor credit rating mean more risks on a factoring company; so if your credit period is long and your credit rating is not that good, you should expect higher fee.
2. Invoice collection might annoy your clients
Not many clients are comfortable enough knowing that their invoices are handled by a third party. It’s also possible that the factoring company’s collection staff acts like what he/she shouldn’t be – i.e. a debt collector – offending, even worse, harassing, your clients.
So, there you go: Some things to consider when you are taking the invoice factoring route. Just remember, use invoice factoring sparingly – having all of your invoices handled by an invoice factoring company might not be a good idea.
Other than a possibility that you offend your clients, it’s probably better to wait than losing 3 percent or so in the form of factoring company fee. If you need more information about invoice factoring, click here.
So, what do you think? Is invoice factoring is a solution for your small business? Please share your thoughts!
On invoice factoring