Small business owners often wear a lot of different hats in their company. They typically handle all of the financial aspects of the business completing everything from invoice collections to payroll.
In a small business, one of the biggest issues is juggling cash flow. The gap between invoicing for work and payment can be a month or longer. Your B2B customers that pay late can drag this out even longer, causing a real deficit in money to fund your business and pay employees.
The Answer
The answer to this problem with the gap in cash flow is to use business receivable factoring. This is not a loan or a line of credit; rather it is an advance on money your customer is going to pay provided by a third party. This third party is known as a factor.
This is actually a very simple process. Your business will invoice your customer on the terms you agree upon. Then, the business receivable factoring company will assume the management of the outstanding invoices you choose to sell. They will provide up to 85% of the value, holding the residual.
This will provide your business with cash deposited into your account within days to be able to pay employees, take on new work, replenish inventory or expand your business.
Once the factor has collected from your customer, the fees for the service will be deducted from the held amount with your company receiving any residual amount.
When to Use Factoring
There are several key times when using business receivable factoring is a very good option for a business. These include:
- When you don’t want to have to deal with collecting invoices or don’t have the time
- When a traditional loan is not possible or not fast enough to access funds
- When you have the opportunity to expand your business but not the cash on hand
Shop around and compare different factoring services. Look for factors with no contract requirements, minimum volumes or extra fees for the best value.
