Profit is important for businesses to survive but is pointless if you struggle with your cash flow. You need to have the money available to clear your debts and pay your outgoings while waiting for other customers or clients to pay you. One way to improve your cash flow is through invoice factoring, which is something worth considering.
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Brief Overview of Factoring Invoices
While you wait for invoices sent out to be paid, there are companies that will loan you the money. This is referred to as factoring your invoices. The companies typically loan a certain percentage, which will keep you out of debt, for a small fee.
That percentage differs between companies but is usually around 85%. The majority of companies only work with business accounts and not consumer ones due to the risk of consumers failing to pay invoices more than businesses.
There is little risk of failing to pay the debt yourself. The invoice factoring financer will control your accounts so that as the money is paid, it goes straight to cover the debt.
The financer will only take the percentage of the money equivalent to the percentage that you borrowed so you will still have some for your company. Some, although not all, will also take on your bad debt, which means they chance your clients for the payments.
The Benefits of Invoice Factoring
The main benefit is that you will have the money to pay your debts. This will keep your business running while you wait for payments and keep you away from insolvency problems. The money you borrow can be spent on any of the bills or debts that you have due so you determine the most important areas.
The companies will actively chase the payments for your invoices when they are due. This makes sure that you are paid and that they will receive the money. It is in their interest to gain the money back. This helps you cut your costs since you will not need to actively seek ways of payment.
Invoice Factoring Solves Debt Collection Problems
Some will even take on your bad debt. There is no need to pay for your own debt collectors and you know that the factoring company will do everything in its power to reclaim the money. This is also a great option if you have had problems in the past with clients not paying the money they owe. You know the hassle that it can be and it is just easier letting someone else take care of it.
There is little need to worry about paying off the debt since the financer will take care of everything. The financer will control your books for the short time that you borrow the money so that a set percentage of each invoice is paid to clear the debt. You will hardly see the money go into your account.
Due to the current economy, there is little stigma on business cash flow problems. The factoring company will not look at you unfavourably for your issue since there are so many other companies suffering the same issue. It will not harm your attempts at getting finance in the future.
Some Downsides to Think About
While there are so many benefits to invoice factoring, there are some downsides to think about. The main one is how your bad debt is handled. When you handle it, you have control over the wording used, the companies used and the methods to seek repayment. You have no control over how the factoring company will handle this process and it could ruin your business relationship with the person who owes money. However, your approach may be the reason for failing to gain the payments.
Another issue is that this only temporarily helps your cash flow. While the companies will not look at you unfavourably, to help avoid extra charges and make the most of your business profit you will need to make some changes to improve your cash flow. There are a number of options including receiving payments upfront for services to avoid debt or changing the length on your invoices.
Invoice factoring is an excellent way to improve your cash flow and something the majority of businesses use. It will help you gain the money when you need it so you can pay off your own debts and avoid further financial problems. The majority of companies will actively chase your bad debt too, which helps to avoid them and you losing out to clients failing to pay everything they owe.
About the Author:
Alex has been writing for Real Business Rescue for over a year and enjoys writing about subject areas around TAX, VAT and Cash flow finance. Real Business Rescue are experts in business restructuring and finance and offer a free company directors helpline to those who are facing financial distress.