Cash flow is always an issue for businesses that offer credit terms to their customers. Worrying about when payment is going to be made, or indeed whether it will be made at all, is an unnecessary distraction when you are trying to run a business and maximise your profitability. That is why many firms have started to use invoice factoring.
Invoice factoring is the process of sending your invoices to a factor as soon as they have been issued. This entitles you to draw down an agreed percentage of the invoices (perhaps up to 85 or 90 per cent) immediately. The remainder (less charges) will be paid to you once the customer has settled the bill.
The most obvious advantage of using invoice factoring is improved cash flow. Even if your invoices specify a strict term for payment, it is unlikely that all of your customers will stick to this timescale. Receiving most of the money immediately increases the working capital available to you and allows your money to work harder for your business. This means that you do not have to worry about being able to pay your own suppliers on time. It also allows you to plan ahead and to take advantage of opportunities as they arise, giving you maximum flexibility and an edge over your competitors.
There are other advantages to factoring your debts. A smaller business may not have a credit control department, and will benefit from having the administrative parts of the work undertaken by a professional debt collector. Factors are very experienced in debt management, and so can chase up outstanding invoices much more efficiently. An added benefit is that, by avoiding awkward conversations with your customers if they fail to pay your invoices on time, you can maintain good customer relationships.
Because of these advantages, many businesses find that invoice factoring is a more favourable way of raising working capital than using bank overdrafts. It is a more efficient method of managing their money and gives the flexibility that they need. For any business that is not already using factoring, it is worth investigating the opportunity that is available.