It is no secret that a healthy cash flow is the backbone of any and every business, no matter the scale or the industry it belongs to. However, it can be a challenging task for small and growing businesses to maintain a steady cash flow in their initial years. To survive and thrive in a highly competitive market, aspiring firms must devise strategies on how to deal with cash flow problems for small businesses.
Factoring is the ideal answer to the million-dollar question of how to overcome cash flow problems. Also known as accounts receivable factoring or invoice factoring, it is a financial strategy used by firms to maintain cash flow. It involves selling their unpaid invoices to a third-party financial company, known as a factor, at a discount.
Sellers are required to issue invoices to buyers when they sell goods or services on credit. The invoices also feature the payment terms and due dates. The payment terms usually state longer deadlines to make the offer more favorable to buyers. However, lengthy payment terms can mean a shortage of capital for sellers. It can also lead to an alarming crisis in case of delayed payment or non-payment of invoices. This is where factoring comes to the rescue.
Instead of waiting for the customers to pay the full invoice amount, the business can sell these invoices to a factor. The factor pays the business a percentage (up to 70%-90%) of the total invoice value upfront, providing immediate cash flow. As such, factoring is designed to benefit firms in their hour of need, especially when it comes to effective capital management. In this blog, we will take a look at how businesses can leverage factoring to solve cash flow problems.
How Does Factoring Help Improve Cash Flow?
1. Immediate Cash:
Sellers often have to wait for several months to have their invoices cleared after raising them. Meanwhile, they still have financial obligations to meet. Factoring provides businesses with quick access to cash, which can be used as working capital for meeting immediate financial obligations, paying employees, settling monthly bills, purchasing inventory and advanced tools, expanding to a new location, or investing in growth.
Funds from the factoring company can help keep business processes running smoothly. Access to quick capital also enables businesses to take on new opportunities in the market. Furthermore, with loans, businesses are obliged to use the capital gained for the specified reason during loan application. With invoice factoring, funds received can be used to meet any business requirement.
2. Faster Processing:
In comparison to traditional bank loans, factoring involves less stringent processes. The processes are hassle-free both in terms of application and approvals. Given that the funds are granted based on individual invoices and not the business’s credit history, invoice factoring companies do not require a detailed track record of their credit history.
It is beneficial for businesses that do not have high-value collateral to offer in order to avail the necessary amount of credit well in time. As a perfect business credit score is not mandatory, many small firms are eligible for invoice factoring. If the key documentation is in place, invoices can be cleared in a day or two by factoring companies.
3. Increased Revenue:
Establishing a strong customer base can be a challenge for small businesses that are new to the market. Most buyers agree to work with sellers that provide credit solutions with longer payment cycles. Growing businesses do not always have the liberty to offer credit to their customers as they often need quick capital to serve new and current orders. Waiting for a long period to have their invoices is not ideal for businesses in their nascent years.
With factoring, even MSMEs can offer flexible payment terms while ensuring healthy cash flow. This can help businesses build a loyal customer network, leading to improved sales and revenue that can be leveraged to scale the business at a faster pace.
4. No Debt Incurred:
Factoring is a unique solution to streamlining cash flow and works differently from taking a business loan or lending. Unlike a loan, factoring involves selling invoices that are essentially business assets. With factoring, a third-party company buys the invoices at a discounted price from businesses.
As such, no debt is created on the balance sheet when businesses opt for invoice factoring solutions. One of the key features of factoring is that it can provide off-balance sheet funding. The finances are never reflected as debt in the ledger. Another key difference between traditional bank loans and factoring is that there is no obligation to pay monthly installments with the latter.
5. Risk Mitigation:
Here, the factoring company takes on the responsibility of collecting the full invoice amount from the customers on the due date. Once the customers pay the invoices in full, the factor returns the remaining amount to the business, with a small amount deducted as a fee.
It is the factor that is in charge of collecting payments from customers. In case a payment is delayed or if a customer fails to pay, the factor has to bear the losses and not the business.
Get Excellent Factoring Solutions with Tradewind Finance
Are you in search of a reliable ‘factoring company near me’ or ‘factoring company in the UAE’, then Tradewind Finance is where your search ends. We are one of the leading international trade finance companies with over 180 employees working from 20 offices located in 12 countries. Our innovative solutions help accelerate clients’ cash flow, allowing them to increase their turnover and take on larger purchase orders for faster growth.
We specialize in cross-border transactions globally for sales made on open accounts, letters of credit, and documentary collections payment terms. Using purchase order funding, inventory lending, letters of credit, and structured guarantees, our financing helps align the needs of both buyers and sellers. We solve short-term cash flow issues by purchasing your company’s accounts receivable in exchange for an advance of up to 95% of the total invoice value.