Invoice factoring is a simple process where a bank or financial institution will allow you to cash in on invoices due by offering you a corresponding loan. This is an option that is particularly attractive for small businesses that are growing fast and are experiencing cash flow issues. While the process itself is simple, the issue is knowing when invoice factoring is a good option for your particular business. Invoice factoring is very different from other types of financing, and addresses very different needs.
Let’s take a look at who should be considering invoice factoring as a financing option.
You Have a Major Client Who’s Slow to Pay.
Dealing with clients who are slow to pay is always delicate, especially when it’s a major client you’ve been working with for a long time. While you ultimately trust them to pay, sometimes, these major clients make up a large chunk of your revenue, and this can make paying for critical functions like payroll difficult. If you’re in that situation, then you are exactly the type of business that should be considering invoice factoring.
Using factoring could also allow you to maintain an amicable relationship with your client. Sending the debt to collectors is a surefire way to alienate them, and put your business at risk.
You Don’t Have the Best Credit.
If your company has bad credit, or doesn’t have a long history, then it might be difficult to access short term financing. This is another occasion where invoice factoring could be a good option for you.
Invoice factoring services will pay more attention to your clients’ credit worthiness than to yours, so it doesn’t matter if your credit is less than stellar. And the beautiful thing with invoice factoring is that it can actually allow you to build your own credit score, even though your clients are the ones repaying.
You Have Nothing to Offer.
In some cases, lenders might ask that you offer some collateral to get a loan. While this is often common for people with bad credit, they could still ask for collateral if you have good credit. If you don’t have anything to offer, then invoice factoring could be an option.
You Have Immediate Needs.
Starting a business costs a lot of money. But you’d be surprised at how many businesses fail because they weren’t ready to deal with expansion. Rapid growth can be a gift and a curse, and there are times when you might need money for urgent equipment repairs or replacement. Or you may need money for basic supplies, like packaging for instance. This is even worse when you blow up overnight and didn’t have the time to build any kind of credit history. This is another example where invoice factoring might be your only viable option.
In short, invoice factoring is a better option if you have day to day cash flow needs, or short-term expenses when you don’t have access to other options. It’s also a good way to adapt to rapid growth, and don’t let it become your undoing.