Improving Your Small Business Cash Flow


The following is a guest post. Enjoy! 

Improving Your Small Business Cash Flow
Every small business owner is looking to improve their cash flow. This can be tough, especially if your business relies on invoicing customers, and then following up on the accounts receivable each month to make sure that payment has been made.  And, as your business and the amount of invoices grow, it will become harder to maintain, and sometimes, harder to collect.  That is where invoice factoring can come into play.

What is Invoice Factoring?

Invoice factoring is where a business sells its accounts receivable (i.e. invoices) to a third-party company at a discount to what is owed.  That company, however, provides the discounted amount of money up front, similar to a cash advance, with the collateral being the outstanding invoices.  There is also maturity factoring, where the cash isn’t provided up front, but instead, payment is paid on the average maturity date of the invoices on the purchased receivables.

How Does Invoice Factoring Work?

Invoice factoring is very different than getting a traditional bank loan because a bank looks at the value of the entire company before making a lending decision.  This can sometimes be hard for a small business or start-up, because there is not always a lot of data to make the banks happy.  However, with factoring, the amount paid is based on the value of the receivables, and it is not a loan.  The factoring company will actually purchase the financial assets that are the outstanding invoices in the accounts receivable.  The factoring company will then make money by the difference between the value of the receivables versus what it paid the business, as well as any commissions or fees charged.

Is It Right For You?

Invoice factoring can be a good solution to many businesses who have a lot of outstanding invoices and need cash flow now.  By selling the receivables, you can get that cash now to continue building your business, and basically let someone else deal with the invoices.

How about you all? Has your business ever used invoice factoring? If so, did it work pretty smoothly?

Share your experiences by commenting below!

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  1. This is very interesting. As the article states – the major problem of small businesses is cash flow. Banks aren't necessarily helping. You have to be in business for 2 years. You have to NOT be in a high-risk industry. You have to pay yourself a consistent income on your taxes. Lots of factors must align to establish credit this way. Because of this, the ideas in the article are worth looking into.
    My recent post What is Supply Trade Finance?

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