When small businesses rely on invoices to provide their company with cash flow, they have to wait for their customers to make payments before they get the money they need. While this is fine if customers pay on time, it’s less than ideal when they pay late. Invoice factoring helps businesses hedge against those late payments by giving them access to the money immediately. The business effectively sells the invoice to a company that gives them the money and collects the outstanding payments directly from the clients. To be successful with this financing method, you need to keep a few things in mind.
Explore Your Options First
Think about why you’re considering selling your outstanding invoices. Is it because you’re tired of dealing with clients that are consistently paying late or are you looking to add cash flow to fund an expansion project immediately? If your clients are taking too long to pay invoices during slow seasons, selling invoices is a great way to take the stress out of the situation. However, if you’re looking to increase cash flow for a larger project, you may be better off taking out a low-interest traditional loan.
Read the Contract In Detail
Just as with any financing option, you’ll be issued a contract that outlines the terms for the invoices you sell. This will include any fees the company charges you for the service as well as any penalties they may assess if your customers fail to repay what they owe. Before you sign on the dotted line, make sure you understand and approve of the terms. If you have questions, don’t hesitate to ask them before you agree to anything.
Understand Your Industry’s Risk
All companies will be charged fees for the invoices they sell, but some industries may be charged higher fees than others. Before you decide that factoring is the best option, make sure you understand your industry’s risk. Ask the factoring company about the types of fees they charge others in your industry and companies in different industries. If the fees you’re getting charged seem too high, you may want to look for a different company to work with.
Have a Plan for the Money
It’s always helpful to have a clear idea of how you want to use the money before you apply. This will help you make the most of every penny you receive from the invoices you sell. If you don’t have a plan for the money, you may end up wasting precious cash flow on projects that don’t serve your business.
Factoring is a great way to increase your business’s cash flow. Just make sure to keep these tips in mind.