If your business is suffering from cash flow problems, then you may need to consider external help. Cash flow problems are experienced by the vast majority of SMEs, and it’s certainly nothing to be embarrassed about. If dealt with quickly, you can resolve the problem easily, too. Here, we discuss how you could use invoice factoring to clear cash flow problems. We’ll cover what it is, how it could help you and some potential downsides.
What is Invoice Factoring?
Invoice factoring is a type of business finance. It converts outstanding invoices that your business has into immediate cash. As such, it’s mainly used by SMEs experiencing cash flow problems (as we say, this is nothing out of the ordinary).
With invoice factoring, you can convert invoices that are not due for up to another 120 days (although this varies between companies who offer the service). You often receive the money for the invoice in two chunks. You’ll get up to 90% of its total value within a couple of days and the final 10% once your customer or client makes payment. Of course, you’ll receive the final chunk of the invoice less a small fee.
Is it Right for my Business?
Many businesses use invoice factoring, but that doesn’t mean that it’s right for everyone and there are a number of factors you should assess before you start invoice factoring. However, let’s take a look at some of the benefits.
Invoice financing is a good option for many because of its flexibility. You can match invoices to working capital needs, both in terms of the amount you need and when you need it. You don’t always have to pick the longest or shortest invoice.
Plus, it’s fast. According to Touch Financial, you can get a pre-approved percentage of your funds within as little as 24 hours. As you can often apply online, there’s no paperwork trail to slow things down.
Plus, remember that you’re relying on a customer’s creditworthiness, not your own. This can be incredibly handy if you’ve just experienced a sales drought. As you don’t need a traditional loan, not only does it not impact your credit rating, but you also have no payments going forwards as long as the customer pays their invoice as promised.
However, remember that invoice factoring may not be right for you. For example, if your business needs extra funding, you need a longer repayment method or if you don’t invoice customers at all. If this is the case, look for government backed schemes to help instead.
Whether it’s invoice factoring or a form of loan, there’s help for your business available, so assess every option closely.