So now that you know what invoice factoring is and how it works, this lesson reviews the top reasons businesses choose to use Factoring Accounts Receivables. These are only some of the most popular reasons and this certainly is not a comprehensive list. Yet more often than not, businesses choose to get cash with Factoring Receivables as a result of one of the following reasons:
- Improve business cash flow
- Keep pace with rapid business growth
- Maintain solid working capital
- It is the standard industry practice
- Meet financial obligations due to poor-performing quarter or season
Let’s review each of these common reasons businesses choose invoice factoring in more depth:
Invoice Factoring Can Improve Business Cash flow
Many businesses are plagued with cash flow difficulties despite effort from business management to stave them off from the start. Good cash flow can loosely be defined as your cash coming in from sales as outweighing your cash going out for expenses. Having enough cash on hand to maintain your working capital is essential to running your business and handling day-to-day business essentials such as paying your employees, paying your overhead, and paying your bills. Poor cash flow is red flag of potential business insolvency, aka bankruptcy, should it continue.
So does poor cash flow always mean a business isn’t generating enough revenue? Not at all. In fact, many profitable businesses, especially in a flat economy, run into cash flow problems due to late-paying customers, seasonal business fluxes or growing too quickly. Let’s look at an example of cash flow creep:
- “Business A” manufactures 1000 widgets to sell.
- “Company B” buys those 1000 widgets for its business.
- “Business A” is happy – it just sold 1000 of their widgets. Though they haven’t collected on it yet, they’ve made the sale and are feeling so confident about it they go ahead and increase their manufacturing capacity.
- 30 days pass and “Company B” still hasn’t remitted payment.
- “Business A” puts in a collection call to which “Company B” calmly replies, “What bill, we never got that invoice?”
- “Business A” resends the invoice and reminds “Company B” that the bill is already past due and to please pay it asap.”
- 30 more days pass and still no response from “Company B.” “Business A” is beginning to get panicky now because it needs that cash to pay for the costs of ramping up manufacturing production from last month.
You can see how this unfolding of events could fair badly for “Business A” – even though they have a big sale. As Kenny Rodgers once sang, “never count your money while you’re sitting at the table.”
Ease Cash Flow Concerns with Factoring Receivables
Businesses can partner with invoice factoring companies to fend off these types of cash flow crunches. The Factoring company can provide you with cash right away, so there’s no waiting around worrying about getting paid. The cash from invoice factoring can be used to pay for the ramping up from production, including paying for those employees and overhead. And, it goes without saying that the dependability and security of Accounts Receivable Factoring can provide you with peace of mind.