It’s often said that SMEs drive the Canadian economy. Indeed, midsize companies alone constitute just 1.6 percent of firms, yet contribute 12 percent of GDP, as McKinsey & Company reports. SMEs also employ nearly 90 percent of the private sector workforce, per government reports. And while these are certainly points of pride for the country, the day-to-day experience of trying to accelerate SME growth, particularly when the economy is less-than-booming, is entirely different. However, many SME growth catalysts are at your disposal, including an often-overlooked form of small business funding. On this page, we’ll explore invoice factoring for business growth, including how it works, what sets it apart from other funding types, and how its unique benefits accelerate SME growth.
1. Cash Flow Accelerates
Factoring for small business is a novel solution in which you sell your outstanding invoices to a factoring company. It’s an alternative to a bank loan or lines of credit that provides a lump sum of most of an invoice’s value upfront. Payment usually arrives within two business days, though some factoring companies offer faster payouts, such as one business day or same-day processing.
You can use the cash advances for any business expenses of your choosing. Then, when the client pays their invoice, you receive the remaining portion minus a small factoring fee.
Most SMEs qualify regardless of time in business or credit rating because the creditworthiness of the entity paying the invoice is of greater concern than yours.
Because of this streamlined process, factoring addresses issues like slow-paying customers that might normally reduce your cash flows without adding strain to your hard-earned client relationships.
2. Cash Flow Evens Out
Eight in ten small business failures can be tied to cash flow issues, as Forbes reports. It’s not necessarily a lack of profit, or even cash, that creates problems for many. It’s inconsistent cash flow that makes it difficult to predict when cash will be available and budget. Factoring can be leveraged to address seasonality or issues like slow-paying clients, making cash flow predictable and budgeting more straightforward.
3. It Keeps the Business Debt-Free
Debt can bog your business down and make keeping up with other expenses challenging. Plus, it impacts your credit, which may make it even more difficult to qualify for a business loan. Factoring doesn’t create debt that your business needs to pay back. The balance is cleared when your client pays the invoice.
4. You Can Accept Larger Orders or Increase Volume
One of the most frustrating issues that business owners face during periods of rapid growth is knowing that more work or orders are available and being unable to accept them due to the upfront expenses. For instance, you might run a manufacturing business and be unable to purchase raw goods, or you might operate a construction company and be unable to bid on a project because it’s too large, and you’ll run out of cash before you hit the first payment milestone. Invoice factoring fills these gaps, making it easier to move to the next growth stage.
5. You Have More Flexibility
Many funding solutions lock you in for a period of time. Some have a complete list of requirements you must comply with, down to how you can spend the cash or which other funding methods you can use. While it may not seem like a problem at the onset, these terms can restrict business growth in unexpected ways down the road as your needs change. Factoring, on the other hand, is flexible. Many companies don’t require that you remain a client for a set period, and most don’t make you meet specific volume requirements each month. You’re always moving forward.
6. You Can Gain a Competitive Advantage
Applying SME growth strategies allows your business to blossom steadily over time, but sometimes growth opportunities seemingly appear out of nowhere. For instance, a key competitor may close its doors. If you’re agile and have the cash, you can launch marketing campaigns that help lead them to you so you instantly capture more of the market. Or, you might find that your SME is poised to meet a new need, provided you can quickly adjust your product or services. These situations don’t happen every day, but you must be able to act on them when the moment arises, or the window closes. Because factoring offers instant funding, it can help you gain a significant competitive advantage.
7. Bad Debt Reduces
Another unique benefit of accelerating growth through factoring is improvements in back-office processes that involve invoicing. Factoring companies run credit checks on your clients, so making informed decisions about how much trade credit to extend to a client at any given time is easy. As a byproduct, your business experiences less invoice delinquency and bad debt.
Factoring companies are also experts in collecting balances, but they go about it differently than a collection agency will. Instead of using strongarm tactics, factoring companies are more likely to remove payment barriers by offering streamlined account management, easy online payments, and excellent customer service. This preserves your relationships while reducing or eliminating bad debt, giving you more cash to accelerate SME growth.
8. Your Funding Scales with Your Business
The amount of funding that your SME needs will likely grow as your business does. One of the significant advantages of invoice factoring is that it can grow alongside your needs too. For instance, you might start out factoring invoices worth $50,000. However, if your order size increases to $100,000, the same company can continue factoring for you.
9. You Have Greater Control of Funding Costs
Most small business financing options seem as if they’re written in stone. With a loan, for instance, you get whatever terms they offer and are stuck with those terms until you pay off your balance in full. Other funding solutions, such as credit cards and merchant cash advances, are structured in a way that makes it very difficult to pay off the principal because you’re buried in fees and interest. Factoring doesn’t work that way. You know your fees upfront and can make an informed decision. Plus, you don’t get stuck in the same debt trap since there’s nothing to pay back.
Accelerate Your SME Growth with Factoring
If you’re trying to accelerate SME growth, invoice factoring services can be the vehicle that gets you where you want to go. To learn more or get started, request a complimentary factoring quote.
