Managing a company’s cash flow is all about establishing the processes you need to compensate for any drawbacks to your business model. For businesses that rely on consumer sales, that usually means something like an advance against one’s merchant account or inventory value. For companies that use invoice billing models like many contracted services and manufacturing businesses, that means finding a way to access the value in your invoices even if customers have not paid yet. Factoring is a time-tested and popular way to do that.
Streamline Your Receivables
Companies that rely on invoice billing models tend to spend a lot of administrative labor on the management of those invoices. You need to send them out, follow up with customers who pay late, and pursue those that default. All of this is in addition to regular bookkeeping duties. Factoring cuts out most of the work of managing your receivables because it literally takes them off your books, allowing you to close out the payment even if it is for a little less than face value. That is because when you use this service, you’re essentially selling the invoice and letting someone else take on the work and the risks that come with collecting the debt.
Improve Your Business Credit
Improving your credit score means making payments on time and watching your debt-to-income ratio. This is as true for businesses as it is for individuals, even if the methods used to create a credit score are very different. Factoring helps with both issues. It does not appear as debt on your credit score because it is not debt, it’s the sale of your invoices. The capital you get can then be used to keep cash flowing to your overhead obligations on time, reducing reports to credit agencies and late fees at once.
Create Reliable Pay Dates for Your Business
Reliable pay dates are about more than just improving credit. They are advantages unto themselves because they let you count on the timing of your funds when planning critical steps to your company’s expansion plans and marketing campaigns. When you can count on a factor taking your unpaid invoices once or twice each quarter, you can build your entire financial planning model around those payments, taking the invoices that are paid early and at face value as a bonus. The key is learning to discipline your budget and your quotes to the necessities involved with factoring so you can create structure from the chaos that is normally invoice billing.