As a small business owner, you know one of the most critical components of keeping your operation running smoothly is having good cash flow. Healthy cash flow enables you to pay your employees, produce new products, keep vehicles operating and provide services to your customers.
So, when you do business with another company and you don’t receive payment from them on time, it can really throw your cash flow out of balance.
This is, understandably, a very frustrating situation, and one in which small business owners unfortunately often find themselves. Waiting to get paid for work that you have already done can really be stressful, especially when it eats into your current capital.
That is why many businesses choose to “sell” their current, unpaid invoices to a company that will finance them and give an advance of cash to the business owner. This process is called invoice factoring and it offers small business owners several advantages.
Invoice Factoring for Small Businesses
Waiting for invoices to be paid can cause major cash flow slowdowns, which means you can’t pay your vendors or funnel that money back into your business. When you have operating expenses, inventory costs, and other bills to pay immediately, these delays can jeopardize your business. As a business financing solution, invoice factoring provides cash to cover these costs and hold you over until your invoices are paid.
Invoice factoring makes your cash flow more predictable by loaning you money up front and using your unpaid invoices as collateral to secure the advance. When you need money immediately, you can sell your current, unpaid invoices to an intermediary that will finance them for you and give you a lump sum cash advance. Typically, you’ll receive about 85 percent of your invoice total immediately.
Once your customers pay the invoices, the lender charges small processing and “factor” fees for their services, and then returns the remaining balance of the invoices to the business owner.
Invoice factoring is perfect for business-to-business (B2B) companies such as manufacturers, IT companies, and professional services providers. Invoice factoring is a great alternative to constantly waiting for customers to pay you.