Small businesses have relied on selling their invoices as a way to obtain capital, as it provides them with funding and solves gaps in their cash flow due to slower invoice payments.
Online invoice factoring, for instance, has made it easier for small enterprises to borrow a working capital. However, you need to be aware of certain things to maximize its benefits and avoid pitfalls. TAB Bank shares some useful information about this business strategy.
You should treat funds derived from factoring as money that is similar to your business’s regular income. A decision to sell unpaid invoices should stem from a need to pay employees, instead of using it to pay for catering at a company event. Likewise, any urgent repairs for equipment or purchase of supplies serve as good reasons for selling invoices.
This also works best in case you encounter clients who fail to pay on time. Depending on your agreement, you need to wait between 30 and 90 days before receiving payment from clients. Any late payments can affect your cash flow. Invoice factoring helps you avoid this scenario, yet it can also be costly for your business if you do it for the wrong reasons.
Small business owners should always remember that the end goal of using funds from invoice factoring involves business expansion. If you are involved in widget production, it makes no sense to invest in a new fleet of trucks instead of buying materials to increase output.
Take note that factoring generally works as a short-term solution to your cash flow concerns. On the other hand, a small business loan should be your choice for longer-term working capital.
The need for invoice factoring depends on the requirements of your small business. It is easy to mismanage funds acquired from this type of financing, so you need to be careful where you plan to spend it.