by Blake Bobit, founder of Solution Scout
Good, healthy cash flow is necessary for you to run your business. You need to have access to the funds that will run your business in an easy, timely manner. If your clients are taking too much time to pay their account, your business will encounter countless issues.
You may not be able to pay your employees, your fixed costs, or make necessary investments in your business. Simply put, good cash flow allows your business to run smoothly.
Invoice factoring makes the most sense for businesses experiencing slow payments from customers and they need cash to cover expenses. It can also be a good choice for businesses that are just starting out, since traditional financing may be difficult to access.
What is Invoice Factoring?
Invoice factoring is the practice of selling your invoices to a third party, who will then immediately give you the majority of the invoice, and then collect payment from your client. When they collect, they will then pay you the remainder of the balance and subtract a small fee.
Invoicing companies exist to give you access to the funds you invoice for immediately. Having the lump sum from the invoice immediately can allow your company to pay needed expenses and operate with greater financial flexibility. Some of the industry leaders will be able to give you the funds immediately, 24/7.
The Best Invoice Factoring Companies
Deciding which factoring company to work with can be a difficult decision. The companies vary in the percentage of the invoice they provide up front, what fee they take, and when they can deliver payment. Here’s a breakdown of the factoring companies worth considering.
Different companies specialize in different sectors. Some offer benefits depending on your industry, like special fuel deals for trucking companies. If you work in an industry like trucking or construction, consider working with a trucking factoring or construction factoring company.
Difference Between Recourse and Non-Recourse Funding
One of the most important things to think about when deciding which factoring company to work with is determining if they offer resource or non-recourse factoring. What’s the difference?
Suppose the situation where you give an invoice of yours to your factoring company, collect the lump sum payment, and go about running your business. Later, the company you invoiced goes out of business and cannot pay the invoice. Who is responsible for that debt?
If your factoring company is non-recourse, then you will not be responsible. You will get to keep the lump sum, and the rest of the invoice will be paid to you whenever the factoring company is able to track down the debt. However, if your factoring company is a recourse invoice factoring company, you will be responsible for the debt. Before working with any factoring company, carefully read their factoring agreement.
Utilize High Interest Savings Accounts
How you store funds for your business can make a tremendous difference in terms of both liquidity and cash flow. A good, high interest account will allow your business to generate profit when funds aren’t needed, and keep your assets secure. It can also increase the efficiency at which you can run your business’s finances.
Benefits of Business Banking
- Accrue interest
- Increase financial security
- Improve cash flow
- Improve financial flexibility
There are many options to consider when opening an account for your business. Each bank has strengths and weaknesses, and some better to work with than others. Here are some of the savings account options which are available.
Consider What Lines of Credit are Available to You
If your business has a good credit score, it may make sense for you to consider a loan. Many banks offer attractive loans to small businesses, especially when there are favorable macroeconomic conditions.
If the economy is strong, and the Fed has maintained low interest rates, you may want to consider taking out a loan. This can be a short term boost to your cashflow, allowing you to make investments to grow your business.
Loans are not a permanent cash flow solution, as they don’t structurally change your business. This means you should not consider them a long term solution to cash flow problems.
Blake Bobit has been an entrepreneur and business owner for over 25 years. He is the CEO and founder of Solution Scout, which he made to provide the most helpful answers to questions about business solutions. Blake provides strategic advisory services to businesses in many industries nationwide and is passionate about helping others reach new levels of success.