When to Use Invoice Factoring 

When to Use Invoice Factoring 

Setting up a business obviously requires some degree of starting capital. For some ecommerce ventures, this can be incredibly low. Nevertheless, there needs to be money there to set everything up and keep things ticking over until profits start to be seen. Once this happens, the day-to-day management of the business starts, and this will always involve a series of regular financial obligations – payroll, inventory, distribution and so on – that all need to be met.

However, while profits may set the timescale for the beginning of daily business and, indeed, when it is time to start growing the business, it’s not healthy profits that actually make all this possible – it’s healthy cash flow. 

You can either pay for something your business needs or you cannot. And whether you can do it or not depends on one of two situations – you either have the money or you can borrow it. If you need to take the latter option, then you have a cash flow problem. The fact that you have the ability to pay back any loans you might take proves that your business is profitable enough for whatever it is that you need to pay for this month. Nonetheless, you do not have the money right now (when it is needed) and that is the essence of a cash flow problem. 

Cash Flow and Invoice Factoring 

A healthy cash flow is essential for a business, but it is not all too common among smaller ecommerce ventures, many of which rely on additional financial services to get them over a period of enough profits, but poor cash flow. Naturally, a bad cash flow means that such companies do not have excessive profits, instead having just enough. This means that growth is not an option while a cash flow issue remains. A company can only grow when it starts making profits above and beyond its operational costs, when revenue is freed up for new investments. 

Therefore, sorting out a cash flow problem is essential for growth. To survive long enough in order to address the issue though, you might need financial help. Luckily, the commonness of the situation means that help is available. Invoice factoring for small business is one the most popular ways to get through cash flow difficulties. This process involves using invoices as security for a loan. 

The factoring service pays the amount stated on the invoice, and when the invoice is paid, they collect the amount (plus a small fee). Factoring service fastFACTR out of Utah say that the majority of their clients are businesses with temporary cash flow problems. This is a particularly important point – invoice factoring, or any other type of the small business loan, is not a long-term solution. 

When Should I Consider Invoice Factoring?

We might have already answered this question. Invoice factoring is a great solution for temporary cash flow problems. It is necessary to have secure profits, as the promise to pay it back actually takes the form of someone else’s promise to pay you (the invoice). This means that it cannot be based upon a mere expectation of greater profits. 

A further point about some invoice factoring though is that it could relinquish control of invoice collection to the factoring company (not all the time though). This is a good thing for companies who could benefit from outsourcing this task, but perhaps bad for those who wish to offer more flexible invoice payment terms to their customers or who simply want more control of the process. 

In the right circumstances, there is no doubt that invoice factoring can be a lifeline. Make use of it – but use it wisely.