Are invoice factoring services the right choice for your needs? Business owners sometimes stumble across them while looking for alternatives to bank loans or a solution to a specific problem. But, because factoring is underutilized, people don’t always know how or when it works best. On this page, we’ll walk you through the process and a few signs your business requires factoring so it’s easier to see if the funding solution is a fit for your business.
How Invoice Factoring Services Work
Invoice factoring services turn your outstanding invoices into immediate cash. Instead of waiting weeks or months for B2B clients to pay, you sell your unpaid invoices at a discount to a third party known as a factor or factoring company. Most factoring companies pay out within two business days, though some offer payment on the day you submit your invoice. When your client pays their invoice, the factor sends you the remaining cash minus a small factoring fee.
Advantages of Invoice Factoring
Invoice factoring works differently than bank loans, lines of credit, and cash advances in lots of ways, so it offers unique advantages.
- Ease of Approval: Most small businesses qualify, even if they haven’t been in business long or don’t have strong credit. This is because factors care more about the creditworthiness of the entity paying the invoice.
- Speed: Many factoring companies can have you approved and set up within a couple of days. Payouts are also quicker, with some offering same-day payments.
- Debt-Free Funding: Because your client pays the balance, your business has no debt to pay back.
- Flexibility: You decide which invoices to factor so you can leverage it as needed and manage your costs better.
9 Reasons Your Small Business Might Need Factoring Services
Now that you know what and how it works, let’s look at some indications for factoring services.
1. Your Business is Struggling to Maintain Steady Cash Flow
Eight in ten small business failures can be traced back to cash flow issues, as Forbes reports. This is because they tend to have smaller cash reserves and are therefore more sensitive to minor shifts in cash inflows or outflows. While factoring won’t solve an underlying issue like a lack of market demand, it can accelerate inflows to ensure you can cover your bills while coping with a temporary issue like rapid growth, a slow-paying customer, or a seasonal shift. It can also stabilize cash flow, so it’s easier to budget.
2. You Don’t Qualify for a Traditional Business Loan
When you apply for a bank loan, everything from your time in business to your credit score is evaluated. This is because the bank needs to feel confident that the risk of non-payment is low. With factoring, your client is responsible for paying the invoice, so their creditworthiness is evaluated.
3. Your Business Is Navigating Seasonal Demand Fluctuations
Coming up with cash to cover bills can be a challenge whether you’re trying to ramp up for peak season or winding down. Because factoring is flexible, you can tap into it just during these periods if you choose. The amount of funding you receive is also largely up to you.
4. Your Business is Struggling with Debt Collection
Many different processes come together to ensure clients pay in a timely manner. Unfortunately, small businesses rarely have the time or workforce to devote to these areas, and cash flow suffers. Invoice factoring companies take care of many back-office tasks that can help in this area.
For instance, your factor will run credit checks on your clients, which reduces the risk of non-payment and can help you identify slow-paying customers before you extend them credit. It’s also standard for factors to collect payments. Some will even prepare invoices for you.
5. You Need Help Paying Your Staff and Suppliers on Time
More than half of all Canadians are living paycheck to paycheck, according to Wealth Professional. Even the slightest delay in payroll may mean they can’t cover their bills or feed their families. Many will begin looking for a new job after a single payroll issue. The situation isn’t much better when vendors are paid late. However, in these cases, you’re likely to receive late fees or lose discounts and may lose any preferential treatment you’re receiving.
If you find yourself coming up on payroll or a vendor payment deadline and don’t have cash available, invoice factoring is one of the few funding methods that can ensure your cash arrives quickly enough to help you preserve your hard-earned relationships.
6. Your Company is Facing Rapid Growth
Unless a business receives cash through other sources, it’s always paying today’s bills with money earned yesterday. This system works as long as inflows and outflows stay relatively stable and the business is profitable. However, when businesses experience rapid growth, the disparity can be tremendous. Labour, inventory, supplies, and more may all increase at once. Factoring accelerates payment, so you’re actually paying today’s bills with money earned today. There’s no disparity.
7. You Want to Take on More Projects
Sometimes, small businesses pass up growth opportunities simply because they lack the working capital to fulfill their obligations. For instance, trucking companies sometimes turn down loads because they can’t afford fuel while waiting for previous clients to pay their invoices. Sometimes, construction companies don’t bid on projects because they can’t afford supplies while they’re wrapping up other projects and waiting for milestones to be approved. There are times when government contractors pass up lucrative contracts because they tend to pay out slowly. If you’re missing opportunities for reasons like these, factoring can help by eliminating waits for payment.
8. You Need Funding to Build and Maintain a Health Inventory
If recent years have taught business owners one thing, it’s that you cannot take inventory for granted. Shortages and supply chain issues can creep up at any time. Businesses that don’t have enough stock don’t just lose businesses in the moment. It damages customer trust and often changes their behaviour. They develop preferences for different products or brands. Factoring can give you the cash injection you need to build up stock, so you’re prepared for supply chain issues and ready to scale as needed.
9. You Don’t Have Any Business Savings
Businesses should have enough cash set aside to cover several months of expenses. That way, you’re prepared for growth surges and emergencies. However, it can take years to build up an adequate cushion. If your business needs cash now for any reason and doesn’t have the savings to cover things, you can cover it with the cash tied up in your invoices through factoring.
Get Help from Factoring Companies Canada
If your business is experiencing an issue like the ones described here or you simply want to be prepared by getting established with a factoring company now, we’re happy to match you with a factoring company that can meet your needs and offers competitive rates. To learn more or get started, request a complimentary rate quote.