Creating a Comprehensive Purchase Order Template in Excel Purchase orders (POs) serve as official documents…
Is Invoice Factoring Helpful for a Small Business?
There are certain standards that every company should adhere to in any industry. For example, if most of your competitors give customers a 90-day payment deadline, it’s not profitable for you to offer more “stingy” terms. But what about freelancers, for whom such a gap between payments can be harmful? To avoid downtime, you can resort to small business invoice factoring. It’s a handy tool with which you enhance your money flow. SaldoInvoice explains how works factoring services for small business and what its pros and cons are.
What Is Invoice Factoring?
Here is the invoice factoring meaning in simple terms. It implies the transfer of bills to be paid by clients to a third party. In exchange, you get the opportunity to receive most of the amount that a debtor should deposit into your account in a short time. In fact, you get access to factoring business loans, although this money is not a traditional loan from a technical point of view.
Depending on the conditions of a particular service provider, invoice factoring rates and interests may differ. As a rule, the sum you get on hand varies from 70% to 90%. Fees may also vary and range from 1% to 5% monthly. You can receive the agreed amount from a factoring agency within two days instead of waiting for payment from a client for several weeks or months.In case your business is in dire need of money, you could apply to a bank for a traditional loan. However, you will most likely be required to leave a deposit.
Moreover, it takes quite a long time to verify your company and review your application.
In the case of invoice factoring, no credit check is needed. The basis for the funds’ provision is the availability of correctly completed bills. Therefore, use an invoice template Google Doc, Sheet, PDF, Excel, or Word formats not to miss important information.
How Does Invoice Factoring Work?
This tool works quite simply:
- You provide products and services following your contract with customers and bill them for work performed. You can do it manually or use a ready-made law, freelance, construction, or automobile invoice template.
- The completed form should be sent to a client and a factoring company. The latter will provide you with the agreed part of the total amount in the next couple of days.
- After selling invoices, you’re no longer responsible for controlling payment receipts. All related issues fall on a third party. As soon as a debtor provides compensation, you receive the remaining funds.
Even with this approach, there is still the possibility that a client will not pay on time. Factoring agencies protect themselves from such risks and charge higher fees or require payment from you.
Factoring Advantages and Disadvantages
For small businesses, invoice factoring offers many significant benefits:
- the opportunity to quickly receive money and, accordingly, support a constant cash flow;
- you can apply to factoring in business more than once, but regularly contact the provider if your company is in need;
- getting money this way is much easier than through a bank;
- after the transfer of invoices to an agency, you relieve yourself of the obligation to control the receipt of money.
Along with the listed pros, you, as a small business owner, should be aware of the contras this financial instrument has:
- the main disadvantage is a rather high cost of invoice factoring, which can be harmful in a limited budget;
- if a debtor don’t pay, you have to compensate for this;
- after the transfer of bills, you no longer control them, so it’s crucial to choose a reliable partner;
- if your orderers did not make previous payments on time, there is a chance that you will not receive the provider’s approval due to high risks.
|Immediate||Can be expensive|
|Speedy||Reputation may suffer|
|Quick access to cash flow||Problems if the customer does not pay|
|Does not affect debt-to-equity ratio||Can make client relationships more difficult|
Before using this tool, you should consider all factoring pros and cons. The benefits of invoice factoring for small businesses are huge, but the downsides can negatively impact their operations.
Advantages and Disadvantages of Invoice Factoring
Aside from the benefits that have been already mentioned, invoice factoring provides owners of small companies with the following advantages:
- Leverage: You can leverage the creditworthiness of your clients instead of using your own, which is a great option for businesses that have had troubles with credit score.
- No Increase in Debt: This method doesn’t increase your debt because, technically, it is not a loan.
Despite this, several downsides are associated with this practice:
- Fees: Ranging from 1% to 5%, the fees can really cut into your profits.
- Potential Discomfort for Customers: Your customers might feel uncomfortable dealing with another company when making their payments.
Improve Cash Flow and Financial Stability Through Invoice Factoring
It is common for small businesses to struggle when managing cash flow. Invoice factoring is one of the possible solutions to this problem as it allows you to gain immediate access to cash and eliminate the time it takes for customers to send in their payments. As a result, this money can be readily used as payroll and to cover operational costs, which will enhance your financial stability.
Here are some helpful tips for choosing and using factoring services:
- Fee Structure: Make sure that you understand all the costs that will be involved in the process to prevent spending more than you can afford.
- Flexibility of Terms: It can be very beneficial to have flexible terms, especially when your cash flow needs can fluctuate by a large margin.
- Customer Service: Keep in mind that certain services, like PayPal, can provide you with bill factoring at a very competitive rate.
Get Guidance to Assess Viability
Overall, it is important to ensure that customers are aware of the factoring process and are comfortable with it. This will prevent any misunderstandings and potential damage to your relationship.
As a result, it is very hard for a small business to figure out on their own whether this method will benefit them or not.