Small businesses need capital to keep their operations up and running. They also need flexible lending tools to fund their expansion. But late payments create cash flow issues and also impact their creditworthiness. Chasing late payments can cost these growing businesses a lot of time and money. This is why merchants need a solution that makes it easier to tackle the issue of delayed invoices – one of the primary causes of late payments. Invoice factoring is a type of alternative financing that helps SMEs tackle the problem of late payments and generate working capital more quickly. In this article, find out more about invoice factoring and how it benefits your business.
What is Invoice Factoring?
Invoice factoring is an important, and growing source of business finance, especially for small businesses. Europe accounts for 65% of the world’s factoring market, meaning this is a reliable source of debt collection that enables a business to successfully improve its cash flow. Invoice factoring makes it easier for a business to turn its pending invoices into fast cash for an optimal price. B2B businesses can instantly recover almost 90% of what they are owed with invoice factoring.
How Invoice Factoring Works?
Also known as debt factoring or accounts receivable factoring, it involves selling some or all of your company’s outstanding invoices to a third party as a way to stabilize your cash flow and generate revenue. The factoring company will pay you most of the amount immediately and the remaining amount minus the fee when the invoices get cleared. They will then collect the entire amount directly from your clients.
Unlike traditional banks, factoring companies (or, services providers) do not assess your credit score. Rather, they are more interested in the creditworthiness of your buyers. They will consider other factors like the risk factors of your industry, the invoice amounts and their time duration, your tax history, your profit margin, etc.
Why Invoice Factoring?
Usually, invoices are cleared anywhere within 30 – 90 days from the date it is issued. Sometimes it takes even longer. This can be a problem because long payment cycles often put small businesses in a cash crunch, making it tougher for them to invest in long-term growth. Factoring services can help a business simplify its financial liabilities and maintain a positive cash flow.
Here’s a look at some of the ways how invoice factoring benefits your business:
1. Gives You Financial Flexibility
Late payments are one of the main reasons why SMBs face cash flow problems. The longer payments get delayed, the more difficult it gets to maintain a positive cash flow. So small businesses need financial flexibility to adapt and evolve with market scenarios. Invoice factoring cushions this imbalance and enables your business to quickly access funds that can help you meet immediate needs or be ready for any unpredicted situation. Moreover, unlike traditional business loans that are limited to certain specific uses, invoice factoring lets you use the money for any business purpose.
By offering flexible solutions to your financial challenges, invoice factoring enables your business to access working capital without going into debt. This will help you tap into better opportunities, run your operations more efficiently, and scale your business.
2. Helps Improve Your Business Credit Score
A good credit score and a stable cash flow increase your chances of getting a loan. Factoring helps stabilize your financial position, making it easier for you to obtain other types of loans in case you need it.
Invoice factoring helps you better manage your working capital. This gives you the funds necessary to run your business and also helps maintain a steady cash flow. Because your invoices don’t end up being a financial liability, it helps strengthen your business credit score. This qualifies you to apply for additional loans and investments in the long run. It also increases your credibility and helps your clients (vendors, buyers, investors, etc.) trust your brand more.
3. Saves Time and Money
Chasing invoices can be stressful, costly, and time-consuming. Invoice factoring is a great way to fight late payments as it frees you from this time-consuming task. Once you sell your invoices, it is the liability of the factoring company to chase those invoices and take all necessary steps to collect the payments from the customers. Further, they will also help you manage your AR process more efficiently.
4. Increases your Sales
Being able to offer credit to new and existing clients can help increase sales. But most small businesses operate with limited funds. So, offering credit to their customers can be challenging. Factoring lets you receive the amount for an invoice immediately. This gives you enough room to be able to offer credit facilities to reliable customers. Moreover, since it’s the factoring company that will be doing a credit score check of your clients it reduces the risk for you.
Is Invoice Factoring a Good Idea for Your Business
Yes, invoice factoring is a good idea for SMBs that regularly deal with late payments or have a lot of pending invoices. If you have a shortage of funds and are looking for a safe and quick way to procure funds to meet your expenses, then you should consider invoice factoring. However, businesses with low-profit margins or with insufficient capital, or those who don’t wish to lose control of their debt collection process should avoid invoice factoring. Similarly, if you’re concerned about disclosing the presence of a factoring company to your clients because this may impact your relationship with them, then you should not consider this option.
For businesses that have a tight budget, invoice discounting can be a better option. But more on that later.
How Can Novalnet Help
Invoice factoring helps improve a company’s financial position. However, you need to ensure you’re working with a reliable third party to have full flexibility and to avoid rigid terms and conditions and hidden costs. With our invoice factoring services, you can unlock newer opportunities and take your business to the next level. Novalnet is a global payment services provider (PSP) with deep experience in helping Europe’s leading brands process their payments. From our instant payment plug-ins to our AI-based risk management tools, we have the resources to get you up and running with your payments in a short time, with minimal coding, and all in a fully secure PCI DSS-certified environment.
Reach out to us today to know more.
Jose Augustine is the Chief Business Development Officer at Novalnet with extensive experience in European payment industry and a knowledge powerhouse.