How Invoice Factoring Gives SMEs a Competitive Advantage

If you operate one of the 1.2 million small and medium-sized enterprises (SMEs) across Canada, as reported by the Small Business Branch, you know all too well that smaller businesses face challenges their larger counterparts don’t. Thankfully, invoice factoring can help solve many of these issues, allowing SMEs to thrive and grow. On this page, we’ll walk you through some benefits of invoice factoring, plus how to leverage it in a way that levels the playing field and helps SMEs overtake their competitors.

How Invoice Factoring Works

Invoice factoring is a financial process that involves selling your B2B invoices to a third party at a discount. Known as a factor or factoring company, the third party provides you with most of the invoice’s value upfront. When your client pays their invoice, the factoring company retains a nominal fee and then sends you the remaining portion.

Factoring is not a loan, so it doesn’t have the same rigid requirements for approval. Plus, there’s no debt to pay back because the client clears the balance when they pay their invoice.

Strengthening Financial Stability for SMEs with Invoice Factoring

For SMEs small and mid-sized enterprises navigating today’s volatile markets, a strong financial footing is crucial. Invoice factoring emerges as a standout strategy, offering more than just immediate cash flow—it also introduces a framework for managing financial risk without the burden of debt. This method is particularly effective during periods of rapid growth or seasonal sales variability, where traditional financing falls short. By providing up to 90% of the total invoice value almost instantly, factoring companies ensure that SMEs have continuous access to capital. This arrangement not only alleviates cash flow challenges but also frees up resources, allowing businesses to focus on core operations and strategic growth initiatives. The adoption of non-recourse factoring further enhances stability by transferring the credit risk associated with client defaults to the factoring company, thus safeguarding the SME’s financial health and credit rating.

How Invoice Factoring Improves Competitiveness

Now that you have some background on how it works, let’s explore some of the advantages of invoice factoring and how it can help your business become more competitive.

Most SMEs Qualify for Invoice Factoring

Large businesses typically have access to capital as needed, which helps them recover from issues faster and seize opportunities as they come up. SMEs, however, are not afforded the same advantages. For instance, roughly one in five small-business owners who apply for loans don’t receive the level of funding they request, according to Statistics Canada.

Conversely, it’s very easy to qualify for invoice factoring in Canada because approval is primarily based on the creditworthiness of your clients rather than yours. By improving access to funding, factoring empowers SMEs to engage in a competitive landscape.

Invoice Factoring Improves Cash Flow

Cash flow can be slow for various reasons, such as slow-paying clients or seasonality. Invoice factoring accelerates cash flow and makes it more predictable. The business can then put the cash toward materials or labour required for the next sale or immediately reinvest it wherever it has the most significant impact.

Invoice Factoring Gives You Greater Financial Flexibility

Opportunities can pop up at any moment. You probably have countless stories about work you could have taken on, products or services you could have launched, or new markets you could have reached if only you had the working capital and could move quickly. These opportunities are instrumental in business growth, but small businesses often miss out because they don’t qualify for a loan or it would take too long for a loan to clear.

Once you’re signed up with a factoring company, you can receive cash the same day you submit your invoice in many cases. That way, you can quickly seize opportunities that grow your SME.

You Can Improve Your Relationship with Your Clients

The odds of selling to a new customer top out at around 20 percent, according to Zippia research. Meanwhile, there’s a 60 to 70 percent chance of selling to an existing customer, and 65 percent of business typically comes from existing customers. In other words, one of the best things an SME can do to stay competitive is to retain clients.

Unfortunately, traditional collections processes can put you at odds with your clients and damage hard-earned relationships. With invoice factoring, however, you’re free to offer your clients payment terms that work for them without worrying about how you’ll pay your own bills while you wait.

Many invoice factoring companies provide collections services too. A good partner will provide your clients with white glove service and will likely offer self-service options such as the ability to pay invoices online. This makes the payment process seamless and reflects well upon your business.

You Can Recover from an Incident or Crisis Quicker

Few things set SMEs apart from their larger counterparts quicker than incident mitigation and response. If a $5,000 piece of equipment breaks, a large business can usually procure another quickly. A small business without an emergency fund will likely need time or external funding to repair or replace the equipment.

Similar issues were seen during the pandemic. Larger businesses were better prepared to move their teams online, switch to contactless solutions, and withstand reduced revenue. Smaller companies struggled then and face ongoing challenges today. Roughly 100,000 small businesses closed in the first few months of the pandemic alone, per Statistics Canada. A further 249,587 remain at risk of permanent closure due to difficulties paying their Canada Emergency Business Account (CEBA) loans, CFIB reports.

While invoice factoring is not a replacement for an emergency fund, it can provide working capital to cover expenses in an emergency or even help businesses get their CEBA loans paid off quicker. This increases the likelihood of business survival and provides an edge over competitors that may still be struggling.

You’re Free to Focus on Your Business

You’re the expert on your business. At the end of the day, nobody is going to understand it like you or pour as much of themselves into it as you do. You are the driving force behind your business and are one of its biggest if not the greatest, assets it has. Your time and effort must be applied where you can do the most for your SME.

Factoring frees you to focus on your business by taking care of things like collections. You may also benefit from value-added services such as fuel discount cards that alleviate challenges like making funds available for your team.

Improving Business Operations with Efficient Invoice Factoring

Improving Business Operations with Efficient Invoice Factoring caused by traditional payment cycles.

By entering into a factoring agreement, instead of waiting SMEs can offload the responsibility of collecting payments, allowing them to focus on their core business activities. This shift not only improves efficiency, it also strengthens customer relationships by removing the potential strain of direct debt collection. The flexibility of invoice finance through non-recourse factoring means that SMEs can operate without the anxiety of financial challenges, knowing that the factoring company handles the risk of customer default.

This method of financing is beneficial for SMEs that experience unpredictable cash flow gaps. By utilizing invoice factoring, these businesses can maintain a steady cash flow, allowing them to plan and execute additional staff hiring and other growth-oriented initiatives without the typical financial uncertainty. Invoice factoring stands out as a versatile and flexible solution, ensuring that SMEs remain agile and customer-focused in their operations.

Why Small Business Loans Fall Short Compared to Invoice Factoring

While small business loans are a common funding option for SMEs, they often come with challenges that can hinder a business’s agility and growth. Unlike traditional loans, which can be restrictive and slow to process, invoice factoring offers a more dynamic and efficient solution. Factoring provides immediate cash flow, enabling businesses to react quickly to market opportunities and operational needs without the typical wait or stringent credit requirements of traditional banking. Moreover, factoring enhances financial flexibility, allowing SMEs to maintain robust operations without the burden of debt that loans usually entail. By opting for invoice factoring over conventional small business loans, SMEs not only expedite their cash access but also avoid the complexities associated with loan approvals and long-term financial commitments. This strategic choice empowers smaller businesses to stay competitive and resilient, even in fluctuating economic climates.

In today’s competitive business landscape, SMEs need reliable financing solutions that align with their rapid cash flow needs. Invoice factoring stands out as a superior choice, particularly because it bridges the gap between receivables and expenditures without delay. Unlike traditional financing options, where the process can be cumbersome, invoice factoring provides SMEs with up to 90% of the invoice value upfront, which significantly improves cash flow management. This financial agility enables businesses to invest in growth opportunities more swiftly and efficiently. Additionally, with non-recourse factoring, the factoring company assumes the credit risk associated with the invoices, allowing business owners to focus on their core operations without worrying about collecting payment. This shift from managing receivables to leveraging a financing solution that caters to immediate business needs exemplifies why many small businesses are opting for invoice factoring over conventional bank loans.

Gain a Competitive Edge with Invoice Factoring

If your business isn’t growing as it could be, or you’re trying to help it break free from the pack, having access to fast and reliable funding can give your business the competitive advantage it needs. To learn more or get started, request an invoice factoring rate quote.