9 Ways Invoice Factoring Accelerates SME Growth

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.

Understanding Invoice Factoring vs. Small Business Loans: Which is Right for Your Business?

When considering financing options for small businesses, it’s essential to weigh the pros and cons of invoice factoring versus traditional small business loans. Invoice factoring, also known as invoice financing, allows business owners to convert outstanding invoices into immediate working capital. Unlike the rigid structures and higher interest rates associated with small business term loans from traditional banks, invoice factoring provides a flexible and efficient solution. This type of funding is particularly advantageous for SMEs that need quick access to cash without the lengthy approval processes or the financial strain of repaying a lump sum plus interest. Factoring companies typically offer recourse or non-recourse factoring, giving you the choice based on your risk preference and business needs. This approach not only smooths out cash flow problems by providing cash within one business day but also eliminates the debt that could hinder a business’s credit score. Whether it’s managing slow-paying customers or needing sudden capital for growth, invoice factoring can be a strategic choice that suits your business’s dynamic needs, making it a compelling alternative to more traditional financing methods.

Struggling with slow-paying customers and unpredictable cash flow? Invoice factoring can be your game-changer. It’s like transforming your unpaid invoices into a dependable credit line, giving your business the financial flexibility it needs to thrive in today’s dynamic market.

Here’s why invoice factoring is smart for growing businesses:

• Faster access to cash: Unlike bank loans with lengthy approvals, invoice factoring gets you funded quickly. This agility allows you to seize fleeting opportunities and keep your operations running smoothly, even when customers take their time to pay.
• Predictable costs: Invoice factoring fees are typically based on a percentage of your invoice, making budgeting easier. This is a welcome change from the uncertain interest rates associated with traditional loans.
• Maintain control: You call the shots. Factoring doesn’t burden you with debt or require constant bank negotiations. You simply sell your invoices and get paid upfront, preserving control over your finances.
• Ideal for uncertain times: Economic fluctuations can wreak havoc on cash flow. Invoice factoring provides a reliable safety net, ensuring you have the funds to cover expenses and invest in growth, regardless of market conditions.

Choosing the right financing option for your small business can significantly impact your growth and financial stability. While traditional bank loans have been the go-to for many, invoice factoring offers a unique advantage, especially for new business owners who might not yet qualify for bank loans. Factoring companies like ours provide an immediate advance on up to 90% of the invoice amount, which means you can reinvest in your operations and grow your business without the waiting period typically associated with a bank loan approval process. Moreover, invoice factoring, also known as receivable factoring, is not just about cash flow; it’s a strategic move for business owners who need to focus on their business without the stress of unpredictable cash inflows. This financing or factoring option adapts to your business needs, offering either recourse or non-recourse factoring agreements that best suit your risk management strategy. Factoring can provide the line of credit your business needs to thrive, distinguishing itself from traditional bank loans by offering flexibility, faster processing, and often a more cost-effective solution for managing finances and enhancing business credit. Whether it’s avoiding the cons of invoice financing or maximizing the benefits, choosing the best factoring company can be the key to navigating the complexities of business financing.

Stop waiting on slow payers. Invoice factoring empowers you to:

• Meet operational needs: Ensure you have the cash to cover payroll, rent, and other essential expenses, avoiding disruptions caused by late payments.
• Invest in growth: Take advantage of unexpected opportunities, invest in marketing, or expand your inventory, all without waiting for customer payments.

Invoice factoring offers the speed and adaptability traditional loans can’t match. It’s the perfect solution for businesses looking to scale up and navigate an ever-changing market.

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.