Business finance tools: how to know when your business is ready for invoice factoring


Cash flow is usually the single greatest challenge that small, growing companies face. Businesses may possess full order books and command plenty of sales but may be starved of liquidity one day to the next, for payroll and payments that come due. While obtaining credit is an option, it isn’t usually easy to come by, and can come with credit-rating issues and expensive interest payments. To many small businesses in this position, invoice factoring is an increasingly important alternative.

What is factoring?

Factoring is an accessible concept. When a business holds outstanding accounts receivable – money due on future sales or sales performed on credit – they possess equity that can be tapped. When the right to collect on these accounts is made over to a factoring firm, they offer immediate payment and collect on those accounts when they fall due. In return for taking on the responsibility for collecting on those accounts receivable and offering immediate funding, they tend to charge a percentage of the sum offered, rates usually cheaper than conventional business loans tend to come with. To small businesses struggling with capital tied up in accounts receivable, factoring can be an important source of liquidity.

When should a business turn to an invoice factoring service?

Invoice factoring is relatively new, having first appeared in the mainstream financial sector around the year 2008, a time when the recession stretched the finances of most small businesses. Many startups and small businesses today tend to associate invoice factoring services with financial difficulties as a result and to stay away. Such associations make little sense, however, because invoice factoring is now regular practice.

At startups: Startups tend to be particularly strained for cash flow because they usually have little to nothing coming in through their first 60 days in business. While they do need to offer sales on credit, nothing falls due during this period. To these businesses, taking advantage of invoice factoring is a quick way to get the cash flowing.

When payments become overdue: Businesses invoice factoring not only when invoices are found to take too long to mature, but when you become hard to collect on, as well. In some cases, debtors are simply unable to pay until well after the due date on an invoice. With invoice factoring businesses are able to hand such problems over to a firm equipped to handle them, and get cash flow going, often in a matter of hours.

When there is a need for short-term financing: Businesses need capital to fulfill large orders, invest in equipment and make payroll. Quickly finding funding for a short-term requirement can keep a business going, or offer help in taking advantage of an important opportunity.

There are other sources of financing available

Small businesses are able to take advantage of accounts receivable in a number of ways, invoices being only one of them. Credit card factoring services allow small retail establishments to tap future credit card sales, and freight factoring services help businesses collect on shipments in transit. Each of these avenues of funding fills an important need. Specialists like Business Factors & Finance can walk you through your options.

It makes sense to work with invoice factoring services on a regular basis

Most small businesses extend credit to buyers with little knowledge of their creditworthiness. Credit checks are rare. This is one reason why these businesses tend to have trouble collecting; sometimes, debtors are simply in no position to settle invoices when they fall due.

Working with an invoice factoring company on a regular basis, rather than just when cash flow problems flare up, helps businesses maintain smoother cash flow, and also helps them ensure that the customers that they extend credit to possess the ability to pay. Seen this way, these services offer businesses an important source of business intelligence.

While invoice factoring may have been an exotic idea a decade ago, it has quickly become one of the most frequently used business financial services available today. Many well-established small businesses correctly see such services as credit insurance, helping protect them from the possibility of bad receivables, and at lower cost levels than such protection would otherwise cost.

As useful as new small businesses would find such financing, they often lack familiarity with it. Learning about this avenue of financing can bring vitally needed insulation against an unpredictable financial environment.


About the author

Lucy Holmes is a businesswoman with years of experience and knowledge which she’s happy to share with others who are just starting out or looking to grow their business.