Having enough cash on hand during tough times is essential for any small business. When sales are slow, you need to pay your expenses and employees to keep operations flowing. Your incoming revenue and outgoing expenditures may not always tie together, which may create cash flow problems. Invoice factoring can help infuse the cash you need to build reserves during these difficult times. Here’s what you need to know about invoice factoring and how to use it to build cash reserves for your small business.
What is Invoice Factoring?
Invoice factoring is a financial transaction solution where you sell your current invoices to get immediate cash. An invoice factoring company buys them from you and handles collection from the customers. This solution is ideal for small businesses with poor credit histories who may not qualify for cash advances from traditional lenders and banks. Invoice factoring companies base the amount you receive on your invoices’ value rather than your credit score.
How Invoice Factoring Works
The factoring company will review the creditworthiness of your customers to determine your eligibility. When your application is approved, you will sign a financing agreement that includes the initial amount you’re able to borrow. Your small business delivers your products or services to your customers and offers them credit terms.
You then send a copy of the invoice to the factoring company, which then issues a payment up to 98% of its value, often within as little as three days. The factoring company collects payment from the customer and deducts a small percentage fee for their services. This fee varies depending on the number of invoices and the creditworthiness of the customer.
Get Paid Faster with Invoice Factoring
Invoice factoring gives you instant access to the cash you need for your small business. You can collect payments faster by using a factoring company. The factoring company issues payments to you within a few days, rather than having to wait a few months for collection. Extra cash reserves provide an emergency buffer or make it possible to take on larger projects you may have postponed or simply cover operating expenses such as payroll when money is tight.
Acquiring a traditional bank loan to build cash reserves can take up to three months to qualify. If you have a spotty credit history, you may not get approved with a traditional lender. Invoice factoring relies on the creditworthiness of your customers. You don’t have to worry about the collections process if a customer doesn’t pay because the factoring company will do it for you. Having a sufficient cash reserve will give you peace of mind as your small business sales cycle ebbs and flows.
Small Business Accounting Solutions
As a small business, managing your finances is crucial for long-term success and growth. If you need assistance with cash flow management or building cash reserves, Myrick CPA may be able to help. We provide small business accounting services to assist you in building a more robust business. Contact us today to schedule an appointment.