Cash flow problems are one of the top reasons up-and-coming businesses have issues during the first few years since many start-up costs deplete the owner’s savings and increase business debt. Alternative forms of financing can be essential for small businesses that are not eligible for larger loans but still need a financial boost. That’s why many small businesses turn to invoice factoring to fix their cash flow problems. Whereas the applications for bank loans require a lot of documentation, good credit, and substantial amounts of time before funding is approved, invoice factoring provides funds easily and quickly.
How Does It Work?
Essentially, a third party will advance you a portion of your outstanding invoices. As the business owner, you’ll sell your accounts receivable book to a third party, which is also known as a factor. For a small fee, the factor will give you about 80% of the invoice’s value in cash, and once the invoice is paid off by the customer, the factor will send you the remaining percentage. The service fees are fairly minimal, generally ranging between 1% and 4% and thus making it an affordable option for small businesses who need a boost to their cash flow. Keep in mind that this is not a one-off situation. Generally, businesses that use this type of financing establish a continuing relationship with the third party company, making it easy to manage a cash flow month to month. Know that your fees will change based on invoice value and volume, your business credit score, the industry you operate in, and the trustworthiness of your customer base.
What Makes It So Easy?
The biggest benefit to using this financing method is that funds are made immediately available for use. This is a lucrative option for small businesses that have a slower season or need cash for time-sensitive operations or last-minute emergencies. Loans can take quite a while to get approval for depending on what loan you seek out, so a quick-and-easy option is always beneficial. Additionally, qualifications are extremely minimal. As long as you have been in business for at least six months, you can use this financing method to boost your cash flow. Collateral and credit checks are not required, and no business plan is needed. If your business relies on clients that pay slowly and you need to increase your monthly cash flow, factoring can be the perfect solution.